CAPSTONE SITUATION ANALYSIS ANSWERS The Situation Analysis exercise provides a structured method for students to study the

current market conditions, how the market will evolve over time, the primary industry report information they will be working with each year, and some of the key decision trade-offs that impact margins and returns. Please Note: The Situation Analysis was revised in January, 2006. The revision only affects the Perceptual Map portion of the exercise. The other elements, Demand Analysis, Capacity Analysis, Margin Analysis and Consumer Report remain unchanged from the previous version. There are two different methods your students can use to conduct the Situation Analysis exercise: 1) (High Tech) An on-line version is available in the Resource Material > Tutorials & Demonstrations section of the student website (and in Resource Material > Manager Guide). The on-line version provides an automated means for them to check their own calculations. 2) (Low Tech) Printable .PDF worksheets are provided in the Resource Material > Tutorials & Demonstrations section of the student website. After students complete the worksheets, you can print off and provide the answers detailed below so they can check their work. Students can conduct the entire Situation Analysis exercise on their own. Or they can divide the activities among teammates, and discuss their findings with each other in a team meeting (as part of the group normalization process). ABOUT THE CAPSTONE COURIER The Situation Analysis requires information from a key industry report - The Capstone Courier. Students can find the Courier at two locations: From the website (after they login and select their Sim ID), click the Reports link; From Capstone.xls, click Last Years Reports in the menu bar. Please Note: Students must use the Round 0 Courier when doing the Situation Analysis exercise (Round # will be displayed on the Courier). Otherwise, their calculations will not be correct. PERCEPTUAL MAP This exercise will help students understand customer expectations for product designs, and how their desires are changing over time. Part 1 asks students to determine the location of ideal spots relative to the centers of the segment circles. Ideal spots are the

position within each segment where positioning demand is highest. Students are asked to mark these locations on the perceptual map. Ideal Spot Locations Relative to Segment Centers Segment Performance Traditional 0.0 Low End -0.8 High End 1.4 Performance 1.4 Size 1.0

Size 0.0 0.8 -1.4 -1.0 -1.4

The arrows below indicate the correct ideal spot for each segment relative to the centers of the segment. The ideal spots drift with the segments, as customer expectations change (depicted below in Part 2). Please Note: Students are given this graphic on Page 7 of the Student Guide. One of the purposes of the Situation Analysis is to reinforce the simulation concepts by actively completing the exercise.

Part 2 asks students to determine the locations of the segment circle centers for each segment as they change, each round.

Traditional Low End High End Performance Size

Performance Size Performance Size Performance Size Performance Size Performance Size

Segment Centers at the End of Each Round 0 1 2 3 4 5 6 5.0 5.7 6.4 7.1 7.8 8.5 9.2 15.0 14.3 13.6 12.9 12.2 11.5 10.8 2.5 3.0 3.5 4.0 4.5 5.0 5.5 17.5 17.0 16.5 16.0 15.5 15.0 14.5 7.5 8.4 9.3 10.2 11.1 12.0 12.9 12.5 11.6 10.7 9.8 8.9 8.0 7.1 8.0 9.0 10.0 11.0 12.0 13.0 14.0 17.0 16.3 15.6 14.9 14.2 13.5 12.8 3.0 3.7 4.4 5.1 5.8 6.5 7.2 12.0 11.0 10.0 9.0 8.0 7.0 6.0

7 9.9 10.1 6.0 14.0 13.8 6.2 15.0 12.1 7.9 5.0

8 10.6 9.4 6.5 13.5 14.7 5.3 16.0 11.4 8.6 4.0

DEMAND ANALYSIS This analysis examines the growth of customer demand as the simulation proceeds through eight rounds. Students use the Capstone Courier to find the growth rates listed in the table below. Growth rates are listed in the Statistics boxes of the Segment Analyses (pages 5-9). Students use the growth rates to calculate industry demand for each year. Students can use this shortcut while doing their calculations: First, convert the growth rate percentage to a decimal (Traditional segment used in this example): Traditional Segment Growth Rate = 9.2% = 0.092 Add 1 to the decimal: 1 + 0.092 = 1.092

Multiply the Round 0 Traditional demand by 1.092. This will give a close approximation of Total Industry Demand for Round 1. Multiplying the Round 1 demand by 1.092 will give the Round 2 Total Industry Unit Demand, etc. Please Note: The answers below are very close approximations. Slight variations might arise due to rounding of the numbers. These numbers are in thousands for example, the six team Traditional Round 0 demand of 7387 indicates the market wanted 7,387,000 Traditional sensors.

Six Companies Round 0 Traditional 7387 Low End 8960 High End 2554 Performance 1915 Size 1984 Segment Five Companies Round 0 Traditional 6156 Low End 7467 High End 2128 Performance 1596 Size 1653 Segment Four Companies Round 0 Traditional 4925 Low End 5974 High End 1702 Performance 1277 Size 1322 Segment Three Companies Round 0 Traditional 3694 Low End 4480 High End 1277 Performance 958 Size 992 Segment Growth Rate 1.092 1.117 1.162 1.198 1.183 Round 1 4034 5004 1484 1148 1174 Round 2 4405 5590 1724 1375 1388 Round 3 4810 6244 2004 1647 1642 Round 4 5253 6974 2328 1973 1943 Round 5 5736 7790 2705 2364 2298 Round 6 6264 8702 3144 2832 2719 Round 7 6840 9720 3653 3393 3217 Round 8 7469 10857 4245 4065 3805 Growth Rate 1.092 1.117 1.162 1.198 1.183 Round 1 5378 6673 1978 1530 1564 Round 2 5873 7454 2298 1833 1850 Round 3 6413 8326 2670 2196 2189 Round 4 7003 9300 3103 2630 2589 Round 5 7647 10388 3606 3151 3063 Round 6 8351 11603 4190 3775 3624 Round 7 9119 12961 4869 4523 4287 Round 8 9958 14477 5657 5418 5071 Growth Rate 1.092 1.117 1.162 1.198 1.183 Round 1 6722 8341 2473 1912 1955 Round 2 7341 9316 2873 2291 2313 Round 3 8016 10407 3339 2744 2737 Round 4 8754 11624 3880 3287 3238 Round 5 9559 12984 4508 3938 3830 Round 6 10438 14503 5239 4718 4531 Round 7 11399 16200 6087 5652 5360 Round 8 12447 18096 7073 6772 6341 Growth Rate 1.092 1.117 1.162 1.198 1.183 Round 1 8067 10008 2968 2294 2347 Round 2 8809 11179 3449 2748 2777 Round 3 9619 12487 4007 3293 3285 Round 4 10504 13948 4656 3945 3886 Round 5 11470 15580 5411 4726 4597 Round 6 12526 17403 6287 5661 5438 Round 7 13678 19439 7306 6782 6433 Round 8 14937 21714 8489 8125 7611

CAPACITY ANALYSIS To successfully manage their companies, students need to know the cost of increasing the number of units they can manufacture. They will need to decide how best to increase output: Increase manufacturing capacity; or Increase automation (which allows a company to profitably run a line on overtime).

This exercise requires the Production Analysis (page 4) of The Capstone Courier. The analysis asks: What Would it Cost to Double Capacity? What Would it Cost to Maximize Automation?

Please Note: These numbers are in thousands for example, the Traditional first shift capacity of 1800 indicates a capacity of 1,800,000 units a year. Answers for simulations with six companies (participant and computer driven). The Product names are for the Andrews Company: Segment Product First Shift Name Capacity First & Second Shift Capacity Automation Cost to Cost to Level Double Maximize Capacity Automation $39.6M $36.4M $16.2M $10.8M $10.8M $43.2M $28.0M $25.2M $16.8M $16.8M

Company Industry Company Industry Traditional Able 1,800 10,800 3,600 21,600 4.0 Low End Acre 1,400 8,400 2,800 16,800 5.0 High End Adam 900 5,400 1,800 10,800 3.0 Performance Aft 600 3,600 1,200 7,200 3.0 Size Agape 600 3,600 1,200 7,200 3.0

Please Note: The Industry Capacities will be less when there are five active companies (participant and computer driven) or less:

First Shift Industry Five Companies 9,000 7,000 4,500 3,000 3,000 Four Companies 7,200 5,600 3,600 2,400 2,400 Three Companies 5,400 4,200 2,700 1,800 1,800 Two Companies 3,600 2,800 1,800 1,200 1,200

Traditional Low End High End Performance Size

First and Second Shift Industry Five Companies 18,000 14,000 9,000 6,000 6,000 Four Companies 14,400 11,200 7,200 4,800 4,800 Three Companies 10,800 8,400 5,400 3,600 3,600 Two Companies 7,200 5,600 3,600 2,400 2,400

Traditional Low End High End Performance Size

MARGIN ANALYSIS Each year there is downward pressure on prices: The upper price limit for each segment falls by $0.50. For this exercise students need the Production Analysis (page 4) and the five Segment Analysis pages (5 through 9) of The Capstone Courier. The Product names are for the Andrews Company.

Segment

Product Name Traditional Able Low End Acre High End Adam Performance Aft Size Agape Margin Potential Traditional Able Low End Acre High End Adam Performance Aft Size Agape MARGIN POTENTIAL

Price $28.00 $21.00 $38.00 $33.00 $33.00 $30.00 $25.00 $40.00 $35.00 $35.00

Material Cost $11.59 $7.81 $15.98 $15.87 $13.62 $8.00 $4.60 $12.00 $11.10 $9.30

Labor Cost $7.49 $7.12 $8.57 $8.57 $8.57 $3.36 $1.12 $6.72 $5.60 $5.60

Overtime (Y/N) N Y N N N N N N N N

Contribution Margin $ % $8.92 31.9% $6.07 28.9% $13.45 35.4% $8.56 25.9% $10.81 32.8% $18.64 $19.28 $21.28 $18.30 $20.10 62.1% 77.1% 53.2% 52.3% 57.4%

This part of the analysis examines the upper reaches of profitability by determining the lowest theoretical costs and charging the highest possible price. Price: The Margin Potential uses the price is the top of the range in each segment In Round 0, the year prior to Round 1, the price ranges were: Bottom $20.00 $15.00 $30.00 $25.00 $25.00 Top $30.00 $25.00 $40.00 $35.00 $35.00

Traditional Low End High End Performance Size

However, there is downward pressure on price. Each year the price ranges fall by $0.50, so in Round 1 the top of the price range is $29.50. Furthermore, it is possible to price above the range as much as $4.90 before reaching the absolute "rough cut" limit that customers will tolerate. When there are product shortages, pricing above the range is risky but viable, and it can improve margin potential substantially. Material: In the example, we assume that MTBF specifications are dropped to the bottom of the reliability range.

Traditional Low End High End Performance Size

Bottom 14,000 12,000 20,000 22,000 16,000

Top 19,000 17,000 25,000 27,000 21,000

Product Able Acre Adam Aft Agape

Current MTBF 17,500 14,000 23,000 25,000 19,000

MTBF drives material costs at the rate of $.0003 per hour of reliability. For example, dropping Able 3500 hours to 14,000 saves an additional $1.05 per unit ( 3,500 X $0003 = $1.05). Material cost is also driven by positioning on the perceptual map. What happens if we do not move our products? Think of it this way. High End products are on the cutting-edge of technology where material costs are highest. Performance customers sacrifice size, so their materials will cost less than High End materials. Similarly Size materials are cheaper. Traditional materials are cheaper still, and Low End materials cheapest of all. If we keep a product on the cutting edge of the High End segment as it moves across the perceptual map getting smaller and faster, its material costs will be the highest on the map. Furthermore, because the material costs at the leading edge of technology stay about the same from year to year, our High End products material cost will remain stable. However, if we let our product fall behind towards the trailing edge the segment, the material costs fall by about $4. The positioning component costs are listed below. The numbers are approximate, and there is some variation (up to 20%) from year to year. Material Costs Due To Positioning Leading Edge Traditional $7.80 Low End $5.00 High End $10.00 Performance $8.50 Size $8.50 To sum, there are two components to material costs: The MTBF rating The positioning component (the location of the product on the perceptual map)

Trailing Edge $3.80 $1.00 $6.00 $4.50 $4.50

Labor: At the minimum automation level of 1.0, starting base labor costs are $11.20. Labor costs fall by 10% ($1.12) for every point of automation. At an automation level of 10, starting base labor costs are $1.12. The exercise asks students to increase automation levels to: Traditional - 8.0 Low End - 10.0 High End - 5.0 Performance - 6.0 Size - 6.0

Students use this equation to calculate labor costs at different automation levels: Minimum Labor Cost = [$11.20 - (1.12 X Automation Ratings above)] + 1.12

Please Note: $11.20 is a rough estimate of the labor cost. It is used solely to illustrate the Margin Potential concept). The Contribution Margin is Price - Labor - Material The Contribution Margin percentage is (Price - Labor - Material) / Price CONSUMER REPORT The Consumer Report analyzes the way products are perceived by customers. Students need to see if there is room for improvement. If competitors increase the rivalry, how can companies respond? This exercise requires the Production Analysis (page 4) of and the five Segment Analysis pages (5 through 9) of The Capstone Courier . They rate each product as shown below:

G =Good F =Fair P =Poor Low End Price F Reliability F Age P Positioning F Awareness F Accessibility P Overall P High End Price P Reliability F Age P Positioning F Awareness P Accessibility P Overall P Performance Price P Reliability F Age P Positioning G Awareness P Accessibility P Overall P Size Price P Reliability F Age P Positioning G Awareness P Accessibility P Overall P

Traditional Price P Reliability G Age P Positioning G Awareness F Accessibility F Overall P

Of course, assessments are subjective, and therefore any answer could be correct. Let's look at this from a "threat potential" point of view. For example, if the expected High End price range is $30 to $40, and the product is priced at $38, let's assume customers would rate the product "poor" because of the potential for competitors to improve their offer. Using that approach, we would score the products as above.

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