WELCOME TO CAPSTONE BUSINESS SIMULATION

WELCOME TO CAPSTONE BUSINESS SIMULATION

ProfessorJeffrey E. McGeeProfessorJeffrey E. McGee

The University of Texas at ArlingtonThe University of

Texas at Arlington

• Demonstrate effectiveness of multi-discipline teams working together.

• Use strategic thinking to an advantage.• Test your business acumen.• Understand overall interaction and impact of

various parts of a business on one another.• Grow an awareness of competition.• Take away practical know-how to improve the

effectiveness of your business.

• Demonstrate effectiveness of multi-discipline teams working together.

• Use strategic thinking to an advantage.• Test your business acumen.• Understand overall interaction and impact of

various parts of a business on one another.• Grow an awareness of competition.• Take away practical know-how to improve the

effectiveness of your business.

ObjectivesObjectives

Why SimulateWhy Simulate

• Risk Free

• View Alternative Strategies

• Enjoyable • Compresses Time (1 Round=1Year)

• Selectivity <> Integration

• Risk Free

• View Alternative Strategies

• Enjoyable • Compresses Time (1 Round=1Year)

• Selectivity <> Integration

SENSORINDUSTRYOVERVIEW

SENSORINDUSTRYOVERVIEW

The Marketplace The Marketplace

Customers (OEMs) need sensors for their productsCustomers (OEMs) need sensors for their products

Initially one segment, now breaking into twoInitially one segment, now breaking into two

Very different customer demands between the two segments

Very different customer demands between the two segments

Diversification in the use and utility of the sensorsDiversification in the use and utility of the sensors

High TechHigh Tech

Low TechLow Tech

The Marketplace The Marketplace

In our industry we track the changing customer demand on a perceptual map

In our industry we track the changing customer demand on a perceptual map

Over 8 years the customers will demand much faster and smaller sensors

Over 8 years the customers will demand much faster and smaller sensors

Market Segments will continue to divergeMarket Segments will continue to diverge

LowTech

HighTech

Low Tech CustomersLow Tech Customers

“I want these sensors to be cheap”“I want these sensors to be cheap”

“I want them to have been around for a while – no Beta Testing!”“I want them to have been around for a while – no Beta Testing!”

“The technology doesn’t have to be cutting edge.”“The technology doesn’t have to be cutting edge.”

“They have to be moderately reliable.”“They have to be moderately reliable.”

You’renot giving me what I

want

High Tech CustomersHigh Tech Customers

“These sensors have to be small, like micro, and fast”“These sensors have to be small, like micro, and fast”

“I need them to be right out of R&D, I’m talking ZERO years on the market”

“I need them to be right out of R&D, I’m talking ZERO years on the market”

“I like a pretty high reliability, but it’s not that important.”“I like a pretty high reliability, but it’s not that important.”

“I’ll pay more to get what I want.”“I’ll pay more to get what I want.”

And I’m not getting what I

want!

SENSOR INDUSTRY ANALYST PROJECT ONGOING GROWTHSees the next 8 years as consistent growth. All market segments increase at a nice “clip,” according to market analyst.

“I see the entire market growing at around 14% or 15% per year. The High Tech market alone will be growing at a whopping 20%.”

I hope those companies out there are ready for that kind of expansion!”

0

1000

2000

3000

4000

5000

6000

7000

8000

Year 1 Year 2 Year 3 Year 4 Year 5

Low Tech High Tech

COMPANYOVERVIEWCOMPANYOVERVIEW

SEC ANNOUNCES BREAKUP OF MONOPLOYFOR IMMEDIATE RELEASE

Christopher Cox, Chairman of the SEC, took dramatic action today by breaking up the monolithic corporation Sensors, Inc.

In a statement to the press Chairman Donaldson outlined the reason and the outcome of this move.

“We cannot allow monopolies of this sort to impact an entire industry!” stated Donaldson. “The customers that utilize these sensors are being held hostage.

“Effective immediately Sensors, Inc will be dissolved into the Andrews, Baldwin, Chester, Digby, Erie and Ferris companies.”

The CompetitionThe Competition

6 Companies6 Companies

$40 Million in Sales$40 Million in Sales

1 Product Lines1 Product Lines

Closed MarketplaceClosed Marketplace

ANDREWSANDREWS

BALDWINBALDWIN

CHESTERCHESTER

DIGBYDIGBY

ERIEERIE

FERRISFERRIS

SHAKE UP IN SENSOR INDUSTRY

Company Fires Management Team

After poor results, lackluster sales and angry customer reports, the Chairman of the Board of Directors has announced the immediate termination of the Management Team.

“This is a black day for our company,” said Chairman Jeffrey E. McGee, “We need to hire a dynamic leadership group who will be able to take this company into the future!”

“Due to this immediate need I have hired the Dream Team to start on January 1st. I expect to see great things from this Executive Team!

WELCOME TO YOUR NEW COMPANY!

WELCOME TO YOUR NEW COMPANY!

Functional AreasFunctional Areas

R&DR&DR&DR&D

MarketingMarketingMarketingMarketing

ProductionProductionProductionProduction

FinanceFinanceFinanceFinance

Research & DevelopmentResearch & Development• Establish the specification of the products to

meet customer demand

• Build the quality and reliability (MTBF) into the products

• Ensure the perceived age of the product meets customer demands

• Create new products to meet the changing marketplace

• Establish the specification of the products to meet customer demand

• Build the quality and reliability (MTBF) into the products

• Ensure the perceived age of the product meets customer demands

• Create new products to meet the changing marketplace

““Our productsOur productsare not wellare not well

positioned inpositioned inthe marketplace.”the marketplace.”

MarketingMarketing

• Set the price of our products in the marketplace

• Build customer awareness through promotion

• Establish a sales force and distribution channels

• Set the sales forecast for our products

• Set Credit Policies AR/AP

• Set the price of our products in the marketplace

• Build customer awareness through promotion

• Establish a sales force and distribution channels

• Set the sales forecast for our products

• Set Credit Policies AR/AP

““Our productsOur productsare not pricedare not priced

optimally.optimally.

And many of ourAnd many of ourcustomers don’tcustomers don’teven know oureven know our

product exists.”product exists.”

• Purchase machinery to automate our facilities

• Buy or sell capacity of product lines

• Schedule production for each line

• Manage the majority of the company’s fixed assets

• Establish your workforce complement

• Purchase machinery to automate our facilities

• Buy or sell capacity of product lines

• Schedule production for each line

• Manage the majority of the company’s fixed assets

• Establish your workforce complement

ProductionProduction

““We are payingWe are payingtoo much fortoo much forlabor costs.labor costs.

Very soon weVery soon wewill run outwill run out

of capacity toof capacity tomeet demand.”meet demand.”

• Acquire capital to fund capital expansions– Issue Stock– Short Term Debt– Issue Long Term Bonds

• Issue dividend to our shareholders

• Balance our debt portfolio

• Manage our proformas

• Acquire capital to fund capital expansions– Issue Stock– Short Term Debt– Issue Long Term Bonds

• Issue dividend to our shareholders

• Balance our debt portfolio

• Manage our proformas

FinanceFinance

““We have poorWe have poorcash flow andcash flow andsubstandardsubstandard

financial ratios.financial ratios.

We have noWe have nofinancial policyfinancial policy

statement.”statement.”

• Balance Sheet

• Profit & Loss

• Cash Flow

• Financial Ratios

• Balance Sheet

• Profit & Loss

• Cash Flow

• Financial Ratios

ProformasProformas

A great management tool driven by forecasts and projections. Allows “What if” Scenarios by the company.

A great management tool driven by forecasts and projections. Allows “What if” Scenarios by the company.

Scoring the GameScoring the Game• Select a minimum of two

criteria to be measured by:– ROE– ROS– ROA– CUM PROFIT– STOCK PRICE– MARKET

CAPITALIZATION– ASSET TURNOVER– MARKET SHARE

• Weight each selection.

• Select a minimum of two criteria to be measured by:– ROE– ROS– ROA– CUM PROFIT– STOCK PRICE– MARKET

CAPITALIZATION– ASSET TURNOVER– MARKET SHARE

• Weight each selection.

RUNNING YOUR COMPANYRUNNING YOUR COMPANY

THINGS TO DO ON AN ANNUAL BASISTHINGS TO DO ON AN ANNUAL BASIS

• Establish business strategy for your company• Analyze Capstone Courier to see industry results• Make tactical decisions across each functional

area (aligned to strategy!)• Upload official results and confirm on the website• Await results when Professor processes• Rejoice in your superior capitalistic acumen• Begin the process again by confirming alignment

of your results with your company’s strategic goal.

• Establish business strategy for your company• Analyze Capstone Courier to see industry results• Make tactical decisions across each functional

area (aligned to strategy!)• Upload official results and confirm on the website• Await results when Professor processes• Rejoice in your superior capitalistic acumen• Begin the process again by confirming alignment

of your results with your company’s strategic goal.

To Do ListTo Do List

Types of Business-Level Strategies• Business-level strategies are intended to create

differences between the firm’s position relative to those of its rivals

• To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

Five Generic StrategiesCompetitive Advantage

Co

mp

etit

ive

Sco

pe

CostCost Uniqueness

Bro

ad

targ

etN

arro

w

targ

et

Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

STUCKIN THEMIDDLE

MY FIRM HASA COMPETITIVE

ADVANTAGE

MY FIRM HASA COMPETITIVE

ADVANTAGE

No Clearly Defined Strategy…

Strategy

•Michael Porter argues for a top-down view. Strategy is designed at the top of the organization, with the goal of positioning resources and building relationships in a unique way.

•Eric Banabeau says strategy should emerge from the bottom-up in a sort of dance with the marketplace, and that the goal of strategy should be to apply simple rules.

From where in the organization strategy should emerge?

CAPSTONE STRATEGIES• Strategies are declared in

corporate mission statements

• Capstone firms may develop and execute any strategy (or none at all - though that isn’t advisable). Basic strategies include:– Overall Cost Leader– Cost Leader with Focus

(Low Tech or Product Life-Cycle)

– Differentiator– Differentiator with Focus

(High-Tech or Product Life-Cycle)

STRATEGYSTRATEGYMission StatementMission Statement

PERFORMANCEPERFORMANCEASSESSMENTASSESSMENT

Success MeasurementsSuccess MeasurementsAnalyst ReportAnalyst Report

Round Analysis - StarRound Analysis - StarSummarySummary

INDUSTRY AND MARKETINDUSTRY AND MARKETANALYSISANALYSIS

S.W.O.T AnalysisS.W.O.T AnalysisCompetitor AnalysisCompetitor AnalysisCompetitive AnalysisCompetitive Analysis

FUNCTIONAL PLANNINGFUNCTIONAL PLANNINGR&DR&D

MarketingMarketingProductionProduction

HR HR FinanceFinance

TQMTQM

Porter Curve

ROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

Extensive coverage on Porter’s theories of competitive advantage are easily located on the internet.

Those theories in a Capstone® context are explained in a tutorial on the website.

ROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

Porter Curve•Firms with High ROI / Low Overall Market Share would likely have a clearly defined focused strategy

•High Overall Market Share / High ROI firms would likely have a strong position in all segments –risky, but effective when executed properly

Porter Curve

ROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

Firms in the middle have a less definable identity, and a hard time competing. They might have a number of “sofa-bed” product lines: Not great sofas – not great beds.

Capstone Strategies

The Situation Analysis generated an overview of the forces at work within the Capstone market place.

Now you must decide how to use that information to gain a competitive advantage.

There are many different approaches - all of which can be successful depending on how well they are implemented tactically.

OVERALL COST LEADER An overall cost leader will attempt to be the low-cost producer in

every segment of the market. They will have good profit margins on all sales while keeping prices low for price-sensitive customers.

• Firm Profile:

– More likely to re-position products than introduce new ones to the market

– Capacity improvements are unlikely to be undertaken (may run overtime instead)

– Automation may be pursued to increase margins

– Investments will be financed with debt and/or stock issues

– Tend to spend less on promotion and sales

– Focus on Market Share, Profits, and Stock Price

COST LEADER WITH LOW-TECH FOCUS

A low-tech focused cost leader seeks to dominate the price sensitive market segments. Their aim is to set prices below all competitors - and still be profitable.

• Firm Profile:

– Multiple product lines in the low-tech segments (Low & Traditional)

– Invest heavily in automation

– Spend heavily on advertising to cost sensitive customers (sales people have more than one product to pitch to prospects)

– Investments financed with debt and/or stock issues

– Focus on ROS, ROE, and Profits

COST LEADER WITH PRODUCT LIFE-CYCLE FOCUS

A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise. Products will be allowed to age and change in appeal from high-tech, to traditional, and eventually low end buyers.

• Firm Profile: Minimum presence in “specialty” segments (Size & Performance) Low R&D spending (very little re-positioning & new product every 2-3

years) Invest in automation early in the product’s life-cycle High spending on promotion and sales Focus on ROE, ROS, and Profits

DIFFERENTIATOR A Differentiator will seek to create maximum awareness and

brand equity. They want to be well known as makers of high quality/highly desirable products.

• Firm Profile: – High R&D spending to keep products fresh– Maintain a presence in all market segments– Spend heavily on advertising and sales to create maximum

awareness and accessibility– Prices tend to be higher– Focus on Market Share, Profits, and Stock Price

DIFFERENTIATOR WITH HIGH-TECH FOCUS

A high-tech differentiator seeks to be known far and wide as the top producer of the best performing state-of-the-art products.

• Firm Profile: – Multiple product lines in high-tech segments (High, Performance,

and Size)– Minimum focus in other segments– High promotion and sales investments to create maximum

awareness and accessibility– High R&D expenditures to continually introduce new product lines

and keep existing products fresh– Unlikely to invest in increased automation or production capacity– Focus on ROA, Asset Turnover, and ROE

DIFFERENTIATOR WITH PRODUCT LIFE-CYCLE FOCUS

A product life-cycle differentiator seeks to be well-known as a top producer of good performing products in each of the targeted segments.

• Firm Profile:

– Multiple product lines in targeted segments (High, Traditional, and Low)

– Minimum focus in other segments

– High promotion and sales investments to create maximum awareness and accessibility

– High R&D expenditures to continually re-position product lines and keep products fresh

– Unlikely to invest in increased automation or production capacity

– Focus on ROA, Stock Price, and Asset Turnover

Strategies EvolveToday’s shift is Today’s shift is

tomorrow’s tomorrow’s nightmarenightmare

• Poor tactics undermine a good strategyPoor tactics undermine a good strategy• Good tactics can overcome a poor strategyGood tactics can overcome a poor strategy

SUMMARY

There is no "magic bullet," guaranteed winning strategy. Each simulation has a unique competitive dynamic.

Successful firms will focus on planning, strategic alignment, teamwork, competitor analysis, and tactical adjustments.

Good Luck and Enjoy!Good Luck and Enjoy!