Capsim Expert Guide

The Capsim Experts Guide
Capsim Experts Guide - April-June 2010 Version. If you are using this guide in a period
other than April-June 2010, the information in this guide is not accurate.
Tir ed of making al l these decisions your sel f ? Get mor e hel p
f r om the Exper ts! Inquir e at inf o@capsimexper ts.com
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Table of Contents
Table of Contents 2
1. Introduction 6
Who are the CapsimExperts 6
What is Capsim? 7
2. Before you begin 7
A) Understanding the Format 7
Foundation vs. Capstone 7
Tournament vs. Footrace 8
Participants vs. Computer vs. Inactive 8
Number of Rounds 8
Advanced Features 8
B) How are you being evaluated? 9
I. Balanced Scorecard 9
II. Analysts Report 10
III. Success Measures 11
a) Weighed Ranking 11
b) Weighed Relative 12
IV. Round Analysis 12
C) How should we divide the teams responsibilities? 13
3. Overall Strategy 15
A) New products 15
Lower Right Limit of High End Fine Cut 15
Upper Right Limit of High End Fine Cut 16
Lower Right Limit of Traditional Fine Cut 17
Center of Traditional Segment 18
Other Strategies 18
B) Segment by Segment Strategy 18
I. Traditional 19
General Strategy 19
R&D 19
Reliability 20
Price 20
Promo 21
Sales 21
Automation 21
Issues 21
II. Low End 22
General Strategy 22
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R&D 22
Reliability 23
Price 23
Promo 23
Sales 23
Automation 23
Issues 23
III. High End 24
General Strategy 24
R&D 24
Reliability 25
Price 26
Promo 26
Sales 26
Automation 26
IV. Performance 26
General Strategy 27
R&D 27
Reliability 27
Price 27
Promo 27
Sales 27
Automation 27
V. Size 27
General Strategy 28
R&D 28
Reliability 28
Price 28
Promo 28
Sales 28
Automation 28
C) A/R Strategy 29
D) A/P Strategy 30
E) HR Module 31
F) TQM 31
G) Advanced Marketing 32
H) Labour Negotiations 33
4. Round 1 Strategy 33
A) Traditional 34
Analysis 34
R&D 34
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MTBF 34
Price 34
Sales and Promo 34
Forecast 35
Production 36
B) Low End 36
Analysis 36
Forecast 36
C) High End 37
Analysis 37
D) Performance 38
Analysis 38
E) Size 38
Analysis 38
F) Capacity 39
Traditional 39
Low End 39
High End 39
Performance and Size 39
G) Automation 40
Traditional 40
Low End 40
High End 40
Performance 40
Size 40
H) Finance 40
5. Round 8 Strategy 41
R&D 41
Selling off Capacity 41
6. Forecasting Guide 42
A) Factors to consider 42
I) Check the Survey Scores 42
II) Current State of your product 43
III) What is your product doing this year? 43
IV) Competitors in the Market 44
Additional Competitors 44
Fewer Competitors 44
Drifting Products 44
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Moving Products 44
V) Capacity 45
B) Forecasting Strategies by segment 45
Low End 45
Traditional 46
Performance and Size 46
High End 46
7. Finance Guide 47
Last Decisions 47
The Cushion 47
Cost of Capital 47
Balancing Risk 48
Other Charges 48
Ratios 48
Limits 49
Using thePro-Formas 49
Round-by-Round Strategy 50
Distributing Cash 50
8. Important Information and FAQ 51
A) Understanding the Survey Score 51
B) How do I decide how many units to produce? 51
C) Understanding Product Moveswith Ideal Spots 51
D) Understanding Reliability 52
E) Understanding Automation 53
F) Understanding Capacity 53
G) Using the Marketing Spreadsheet 54
H) Cross Sales 55
I) Spotting a Product that is Switching Segments 55
J) Figuring out where a New Product will be launched 56
K) Product Naming Tricks 56
L) Price Wars 57
M) How many Units will I be Able to produce in my Products First Year? 58
N) What does a typical turn look like? 59
O) What will the computers do? 60
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1. Introduction
In compiling this guide, our experts have gone to great lengths to try and focus on the
most important aspects of the game. This might explain why some of your inquiries and
not included, and why so much emphasis is put on certain sections.
Capstone has put together a manual which explains the basic concepts of the game. They
have also put together a slightly more detailed online manual which answers to some
further questions.
It is not our intention to replicate any of the material that can be found in either of those
two guides. This Ultimate guide will not only open your eyes to the many unknowns that
Capstone has to offer, but it will also offer a surefire strategy to getting that Elusive A+.
If you want to skip straight to the recommendations for round 1, skip to page 34, for the
round 1 decision by decision guide.
If anything is unclear in the guide, please send an email to info@capsimexperts.com and
one of our experts will respond to you within 48 hours. We provide general answers to
areas that are unclear in the guide, but if you are looking for more detailed help, you can
hire members of our team at the rate of $60 per hour, or $120 for each round of the
simulation. Many of our clients choose this route, and they have been quite pleased with
the results. We routinely score in the 99th percentile for the teams that hire us. We run
hundreds of simulations, and as you can expect, we have become the premier experts on
all things Capsim related. Drop us an email, it can't hurt to ask!
Finally, as this guide is the fruit of years of research by many different individuals, we
ask that you refrain from unauthorized distribution of this guide. Rest assured that our
legal team will aggressively prosecute any illegal redistribution of this guide (including
but not limited to criminal sanctions and liability for damages including punitive and
exemplary damages).
Who are the CapsimExperts?
We are a group of analysts who have studied and dissected thousands of pages of data to
bring you the absolute best strategy for Capsim. Our team has several MBA's, a lawyer,
an accountant, a stockbroker, an investment banker as well as an actuary. Our Capstone
Experts have run hundreds of Capsim simulations and have routinely placed in the top
percentile in Capstone Challenges. Some of our Capstone Experts have placed in the top
spots out during Capstone World Challenges. Quite simply, nobody is better at this
simulation than us.
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We have a proven track record of success, and clients who use our product have
consistently scored in the top few percentiles and routinely get the top marks in their
class. We continue to be in business because people love our product, and our product
helps them out like no one else can, its that simple!
What is the Capstone Simulation?
By now, you may have read the introductory material about the Capstone Simulation
(Use of Capstone and Capsim will be used interchangeably in this guide, and they both
refer to Capsims Capstone Business Simulation). You probably know that in Capstone,
you are running a simulated business in a simulated market. You control one of six
companies and you sell electronic sensors. What the product does is completely
irrelevant, but what does matter is that you currently have five products in five different
market segments.
Capstone is a very challenging game and requires hundreds of hours of practice and
analysis in order to achieve a complete understanding of the delicate intricacies it has to
offer. We realize that most MBA/Commerce students and most employees who are using
Capstone do not have the time to spend hundreds of hours on a simulated game. This is
why we have created the Ultimate Experts Guide to Capstone.
2. Before you Begin
Read the two Guides offered by Capsim. Although they are both very long, we strongly
recommend that you begin by reading these two guides. After doing so, you will notice
that this guide will make much more sense. Please also run at least one 8 round rehearsal
simulation online. This will give you a sense and feel for forecasting and other important
decisions.
A) Understanding the Format
It is important to know what type of simulation you are engaged in before you begin.
There are many different variations as to scoring and as to rules of the game. Depending
on your professor's preference and his/her style, there are many different possibilities for
how your simulation is set up.
Foundation vs. Capstone
We refer to Foundation as Capstone Light. Foundation is a much simpler game with a
smaller budget, less products and much less decisions. While this guide will help you in
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understanding how to generate a successful business in Foundation, this guide will best
serve those in a Capstone Simulation.
Tournament vs. Footrace
This is an important distinction that each student must understand. In a Tournament,
your team will be competing against other real teams from your class in a six-team
industry. Your competitors are your classmates.
In a Footrace, your team will not be competing in the same industry as your classmates.
Each team in your class will have its own industry and computers which will serve as
competitors in each industry. Footrace results usually then graded on Profit, Cumulative
Profit, ROS, ROE, ROA, Stock Price, Asset Turnover, Market Capitalization and Market
Share. Footraces are typically used in large classes.
Participants vs. Computer vs. Inactive
Your professor has the ability to change the number of competitors in each industry up to
a maximum of 6 total companies. In the majority of Schools, professors will run the
simulation with 6 teams. Professors will typically try to make it so that the group sizes
are 3 to 6 individuals. In a very small class, the professor may only have two or three
teams which will go up against 3 or 4 computer opponents. Very rarely, a professor will
set one of the 6 teams to inactive, thus reducing the total number of competitors. It is
important for you to know how many competitors will be in your industry, as fewer
competitors mean a larger market share and more production for each team.
How many rounds are you playing?
While most professors use the full 8-round simulation, there are some schools that run
one or two practice rounds and then reset the simulation after the first or second round.
This has the effect of reducing the length of the game. Make sure that you understand the
duration of the actual game, so that you can make better decisions.
Advanced Features
Its also important to know which of the advanced features are active, and when they will
be activated. Below is a list of advanced features that may be activated by your
professor. Before you begin, its important to know when and if these will be made
active by your instructor.
Human Resources: The HR module is typically the first one that gets activated, and this
usually gets done in rounds 2 or 3.
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Total Quality Management: TQM is a very important component that often gets
overlooked and it usually activated in rounds 3 or 4.
Labour Negotiations: Most instructors choose not to turn the Labor Negotiations on, but
some profs still use this feature. There are usually one or two negotiation rounds during
the simulation.
Advanced Marketing: This feature may be turned on in the early to mid-rounds and
makes it difficult to maintain high levels of awareness and accessibility. As it is much
harder to maintain high levels of awareness and accessibility when this module is turned
on, drifting products is much tougher if this module is turned on.
B) How are you being evaluated?
The majority of professors evaluate the students based on the Balanced Scorecard. Some
professors use the Success Measures option, and some use the Analysts Report as a
performance indicator. We've even heard of some profs simply choosing one success
measure, such as profits to evaluate their students. Some profs will elect to use a hybrid
of the three main evaluation methods. The World Capstone Challenges use the balanced
scorecard. While most of the teachings in here will refer to points scored under the
balanced scorecard, there is so much overlap in scoring methods that they will apply
across the board. Below is an outline of the scoring systems your prof can choose from.
I. Balanced Scorecard
The great thing about balanced scorecard is that mistakes are not penalized as severely as
they are in Analysts Report. For example, an emergency loan of $1 will cost you well
over 100 points in the analysts report, but will cost you fractions of a point in Balanced
Scorecard. In our opinion, the balanced scorecard does a better job of measuring the true
long term success indicators of a company. It is also quite easy to score relatively well in
Balanced Scorecard as there are no surprises.
You need to familiarize yourself with the scoring system of the Balanced Scorecard. To
do this, simply click on the "Pro-Forma" menu in your Capstone Excel Spreadsheet and
select Balanced Scorecard. In some newer versions of Excel, we have seen that this
option is sometimes greyed out. If this is the case, try using an older version of excel, or
try contacting Capsim. It is primordial that you be able to look at the Balanced Scorecard
before you submit your final decisions, we cannot understate this enough.
You will note that the total score for an 8-round simulation under the Balanced Scorecard
is 1000. The majority of points are awarded on a round per round basis, with fewer points
are available in the first rounds. Approximately a quarter of the total points are awarded
after the last round as an aggregate score. It should also be mentioned that the points
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awarded for different targets change from round to round, and the full point targets also
change from round to round. Basically, you need to be improving efficiencies on a
round-by-round basis in order to keep getting full points.
The points are awarded in a linear fashion, meaning that if the goal for profits is $8
million and you make $4 million in profit, you will get half the total points awarded for
profits. Take a solid five minutes and review the components of the Balanced Scorecard.
To do this, simply click on the highlighted portions of the Scorecard and they will
indicate how the scoring is done for each individual metric. Some points are very easy to
get, while some you will have a hard time getting early on. It is impossible to get a
perfect score of 1000, although some of our experts have scored 900's. Anything over
900 is considered a runaway success and anything over 800 will surely get you an A+ in
the course.
Some points are impossible to get. For example, in the early rounds, getting full points
for product count is impossible, as you cannot possible have 8 products in the first or
second round. Awareness and accessibility are also very difficult to get in the early
rounds. Awareness continues to be difficult to max out even in the later rounds. Finally,
if TQM is not turned on, you will not be able to get the learning and growth points.
II. Analyst Report
Although our experts consider the scoring method flawed, some schools still use the
Analysts Report scoring method. Nevertheless, it is important that you understand how
the Analyst Report is scored. There are 10 categories (Margins, Profits, Emergency
Loans, Working Capital, Market Share, Forecasting, Customer Satisfaction, Productivity,
Financial Structure, Wealth Creation) and each category is worth 100 points. Some
categories are all-or-none, where you either get 100 points or you get 0, some are linear,
where your points are scaled according to how well you did, and some are tiered where
you can get either a portion of the points, or none (ie you get 0, 50 or 100).
If you are being evaluated on the Analyst Report, it is important that you understand how
each of the metrics is measured and what the limits are to get full points. To see how a
category score was determined, select a category from the select box on the left-hand
side of the screen. A perfect score is 8000 points, which is effectively impossible to get,
but we have seen scores in the high 6000's. Anything over 6000 is considered a very
good score.
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III. Success Measures
Success Measures allows the individual teams to decide on how they want to be
evaluated among 8 performance measures (Profits, Market Share, ROS, Asset Turnover,
ROA, ROE, Stock Price, Market Capitalization). By default, each team has just over 12%
assigned to each measure but a team can decide to allow anywhere from 0-50% for each
measure, which must total 100%. It is also very important to know which method your
prof is employing. Your prof may allocate points for average, ending or cumulative.
Most profs will use cumulative for Profits, ending for Stock Price and Average for all
other measurements. For measures selected as Average, instructors may decide whether
to weigh each round's results evenly or prorated to allow for greater emphasis on later
rounds. The prof may also decide to use Weighed relative or Weighed Ranking to score
you. Make sure to get all of this information from your prof before you assign values.
The broad strategy that we suggest you employ will make it so that your sales will be
very high, but your margin may not be the highest, meaning that your return on sales may
not be very high, but your return on both equity and assets should be very high. Also,
your market share will likely be among the highest as will your overall profits.
Depending on what financial structure you used, your stock price and market cap should
both be among the highest of your competitors. We recommend a strategy which
somewhat hedges against a failure in one department and distributes your points
somewhat evenly among the following:
ROE: 25%
ROA: 25%
Market Share: 15%
Profits: 15%
Stock Price: 10%
Market Cap: 10%
a) Weighted Ranking
Final Score Ranking: This method displays charts that compare each team's results
against each team's set of weights. Specifically, the Andrews chart will show every
team's performance based on Andrew's success measures, the Baldwin chart will show
every team's results based on Baldwin 's measures, etc. The final chart, Overall
Scoring shows each teams performance based on their individual criteria, allowing an
across the board comparison.
Final Score Ranking calculations use a three-step process:
The system determines a raw score for each category: Each team gets 1 point for itself
and 1 point for each inactive team however, teams with negative results could fall
beneath this level.
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Companies get an additional point for each active (participant or computer) team they
beat. There will be times when the first and second place team for a category are very
close. Nevertheless, the first place team will always receive a score of 6 and the second
place team a score of 5.
The system creates an adjusted score for each category by multiplying the team's raw
score by its success measurement weight. For example, if Andrews' ROE weight were
20%, and if it were first in that category (scoring 6 raw points), it would receive 1.2
points.
The adjusted scores for each category are added together. The resulting score will always
be between 1 and 6.
b) Weighted Relative
With the relative ranking, the system determines a raw score for each category by
dividing the team's score (Team's Value) by the by the highest scoring team in that
category (Highest Value). For example, if the Team's Value for Profit is $5,000,000 and
the Highest Value is $10,000,000, the team receives a raw score of.5 ($5,000,000
$10,000,000 = 0.5).
Next, the system multiplies the raw score by the success measure entry. Continuing with
the example above, if the teams success measure (Team Weighting) is 12.0,
multiplying 12 by 0.5 will derive a Score of 6.
The scores for each category are added, and the resulting sum appears in the Total row.
IV. Round Analysis
Finally, some instructors will use the Round Analysis, which is a very basic method of
evaluating. The Round Analysis is a simplified method for assessing company
performance. Based on zero to five stars, the Round Analysis returns scores for these
areas: Contribution Margin, Emergency Loans, Inventory, Stock Price and Profits.
The Round Analysis is typically used in High Schools and in Business Introduction
courses. The Star Summary recaps the stars awarded in the Round Analysis .
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C. How should we divide the responsibilities among our team?
We feel that it is important to give each team member a segment to work with. This
allows each team member to focus specifically on their direct competition in their
segment, and they can run simulations with their segment. Each team member will
effectively become an expert in their own segment. While we are aware that the
Capstone Guide has other recommendations, we strongly suggest that your team divides
its members into segments. Each team member will then be responsible for making
decisions on R&D, Pricing, Sales and Promo, Forecasting, Production and
Capacity/Automation for their product. We strongly feel that it is the most effective way
of splitting up the work.
We would also recommend that each team names someone who will be responsible for
submitting the final decisions and conducting the final review of the decisions before
they are submitted. The reason for this is to avoid having two people save over each
others decisions. As the deadline approaches, the entire team knows that only one person
can finalize the decisions, and no one will take on this liberty if they are aware that it's
their team member's responsibility.
You should also select an individual who will be responsible for finalizing the financial
decisions. We recommend you select an individual who has a financial background or
who understands the implications of the various financing options. While all team
members can provide input for the financial decisions, one person needs to have the
power and authority to finalize the decisions; otherwise, it could lead to chaos.
We recommend that the person who is charged with making the final review should also
be charged with the financial decisions (The "CEO"). Otherwise, you will need to get
two people involved every time a slight adjustment is made to a forecast or a production
number. Since this person has the heaviest workload, we would recommend that they be
given a simple segment (size or performance).
This does not mean that each team member has the final say on all decisions in their
segment. What we recommend is that you set a team deadline to have all decisions saved
on the website. Once these decisions are saved, each team member can go over the
decisions and see if there are glaring errors or omissions. These can then be discussed
and corrected before the decision deadline. Below is an example of a schedule that a
typical team can employ:
Deadline for each team member to submit his/her segment decision: Friday 8:00 pm
Deadline for team members to give feedback on teammates decisions: Sunday 11:00am
Team meeting Sunday 2:00pm
Deadline for CEO to finalize decisions: Monday 9:00am
Deadline to submit decisions for class: Monday 5:00pm
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This allows two windows of review if the teammates want to be deeply involved in the
decision making process. It allows an initial review period where each team member can
comment on their teammates decisions. It also allows a secondary period of review after
the CEO has finalized all decisions. The sample schedule above assumes a team meeting
every week. In reality, what we have seen is that once the team has gone through the first
few rounds, team meetings can be eliminated. We strongly recommend that all teams
meet in the first 2 or 3 rounds. If the team feels comfortable doing online meetings and
emailing forecasting/production recommendations, they can switch to that format in the
later rounds.
Below are some ways that our experts suggest dividing the responsibilities.
6 Members
Member 1: Low End
Member 2: Traditional
Member 3: High end
Member 4: Size and HR
Member 5: Performance and TQM
Member 6: CEO
5 Members:
Member 1: Low End
Member 3: High end
Member 4: Size and CEO
Member 5: Performance and HR/TQM
4 Members:
Member 1: Low End and HR/TQM
Member 3: High end and CEO
Member 4: Size and Performance
3 Members
Member 1: Low End and CEO
Member 2: Traditional and High End
Member 3: Size/Performance and HR/TQM
According to our experts, a pattern that will typically develop in most teams is one where
some team members take over the segments of others. This can be explained by the fact
that some of the team members will have more time/energy/enthusiasm with respect to
Capstone than other members and will take a larger role in their team's decisions. As this
becomes evident, we often see team members step aside and others step forward.
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4. Overall Strategy
The strategy that is best employed for first time players and people who want to achieve
success with the fewest variables is a Broad Differentiation Strategy. This means that we
will maintain a presence in every segment and attempt to differentiate the product by
focusing on the important buying criteria for each segment. Most products will be priced
at or near the top end of the fine cut for their segment. This strategy makes for simple
moves during each of the rounds, and allows the team to focus on effective forecasting
which typically generates a lot of points in all the evaluation methods.
A) New Products
Because release dates are so finicky and because it is impossible to know what is
happening in the segments after the first round, we will give you the basic knowledge that
is required to understand the concepts behind launching new products, and we will give
you a recommendation as to their launch year. However, because of the high number of
variables, you will have to decide when to launch them and what type of strategy to
employ with them.
If you are concerned that you will not be able to successfully forecast and manage the 7th
and 8th products, you can still have much success in only creating one product. If you
decide to only create one product, create the product at the lower right limit of the high
end fine cut and allow your current high end product to drift to the traditional segment (or
move it to the traditional segment). This will give you one solid product in the High end,
and two in the traditional segment. The downside is that you will not be able to drift your
current traditional product to the low end, thus sacrificing much overall market share.
This is why we strongly recommend that teams that are playing in 8 round games initiate
at least 2 new products and preferably 3 in total (ideally one or two should be launched in
round two and the others in rounds 3 and 4)
I. Lower Right Limit of High End Fine Cut
The first of these products should be a high end product which is initiated at the lower
right portion of the fine cut. Its low age will virtually guarantee huge sales, and will
allow you to drift (or move) you current high end product to the Traditional segment.
This new product will be a dominant player in the high end segment for the duration of
the game.
When you are creating this product, it is important to create the product so as to launch it
ahead of the ideal position (lower and more to the right). For example, if you are creating
this product at the beginning of round 2 with a release date of August year 3, you should
aim to release the product somewhere around the ideal spot for December of year 3. The
ideal spot in August of year 3 is 11.2/8.8. However if you were to release a product on
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this ideal August spot for an August release date, this would cause your product to be
significantly behind the segment drift when it came time to move the product on Jan 1 of
the following year. Since the ideal position is so important in the High End segment, you
must be aware of the rapid segment drift, and you must plan to launch products ahead of
the ideal position on launch date.
The ideal move is to position the product with an August release to the December 2012
ideal spot. This would mean a positioning of 11.6/8.4. When releasing new products
such as this, it is especially important to make sure that the products are being released
within the fine cut. It would be a great mistake to release a product far ahead of the ideal
spot that it would not even be located in the fine cut. To review if products are being
released in the fine cut, please review the limits of fine cut and rough cuts in the
Appendix.
When you create this product, make sure to have sufficient capacity for the first year. If
there are no other competitors in the High end segment, you will likely need 600 units of
capacity in the first year. It is important to be aware that you will only be able to produce
units for the period after which your product is launched.
Once the product has been created, its management becomes quite simple. Every year,
you must simply R&D the product down and to the right, towards the ideal position of
next year. Spend 1,500-1750 on Promo and spend 1750-2000 on sales until the product
approaches 100% for both of these. Use your basic forecasting skills and produce 125%
of your worst case scenario. This product should provide you with a very nice return on
your initial investment.
There are several different viable options for where/how to create/launch your second
new product. Each option has worked quite well, and each depends on how the
competition has stacked their cards in the first few rounds.
II. Upper Left Portion of Fine Cut
One option is to create a product that will be launched at or near the upper left portion of
the High end segment and which will drift to a convenient location inside the traditional
fine cut in its second year. This will allow the product to sell units in the high end
segment during its first year when it has a low age, and then it will drift in the traditional
segment where it will enter and mature to the ideal age.
The location of this product is very important because once it is created, it will not be
moved for several years. Remember that you want this product to complete its first 3/4
or half year inside the high end fine cut. Essentially, you want this product to exit the
fine cut exactly at the beginning of the year in which it will begin full time sales in
traditional. The optimal point to launch your product if you are aiming at having it enter
into traditional in January of the fourth year is 8.4/11.6 and if you are aiming for a
January release of the fifth year, you should launch aim for 9.3/10.7. This represents the
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upper left limit of the fine cut for High end. Once it exits the High End Fine Cut, you can
focus on selling those units in the Traditional segment.
The added bonus of this strategy is that the product does not need to be moved until much
later in the simulation, depending on your strategy. Another added bonus of this strategy
is that is can be repeated in consecutive years (make sure you adjust your positioning so
the product is launched a full year down and to the right), and when the same strategy is
repeated in consecutive years, you will get a fantastic idea as to the success of your
product, and you will know exactly how to forecast for this product.
A product launched in accordance with this strategy after the second year for release in
the fourth year will sell approximately 400 units in its fictitious first full year. This
means that for a May 1st release date, it will sell about 266 units and for a July 1st release
date, it will sell about 200 units. The end of year survey score in the High end will be
approximately 20, and its opening survey score will be approximately 35.
III. Lower Right Portion of Traditional Fine Cut
Another possible option is to simply create a product for sale in the traditional segment
without worrying about starting it in the High End segment. To do this, you create the
product somewhere near the bottom right of the traditional fine cut and you let it drift
until it ages to 2.7 years or so, where you will R&D it again. Ideally, your product would
pass through the ideal point when it's 1.5-2.5 years old, that way you were certainly have
the best product on the market.
The advantages of this move are that the forecasting should be easier and the costs should
be less than starting the product in the High End segment. Among the major
disadvantages are that the product will not have a good first year on the market (due to its
low age). Additionally, the margins will be reduced due to the fact that the product will
be launched so far ahead of the ideal positioning. Every time your strategy is to drift a
product, you need to be aware that due to its positioning ahead of the ideal point, the
material costs in production will be higher than if it trailed the ideal position. This must
be seriously considered every time you are creating and drifting products. You should the
advanced marketing module, because if it is enabled, drifting products has much less
success than starting one in a segment and staying there.
To illustrate, let's pretend you are creating this product in the beginning of the third year.
The R&D map tells you that it will take 15 months to create this product, meaning that it
will be released quarter-way through the fourth year. The ideal position in April of the
fourth year is 7.3/12.7. You should create the product so that it is two years away from
the ideal spot when launched. This spot would be 8.7/11.3. This would allow your
product to become better and better over the years and would save your company some
R&D costs.
Page18
IV. Center of Traditional Segment
This strategy is meant to create an eventual 3rd product in the low end segment. The
strategy is to create a product somewhere in the middle of the traditional segment, have it
released early on in year 2, and then let it drift for two and three quarter years. After that
time, ideally, it would enter the fine cut of the low end segment, where it would be aged
somewhere around 2.8 years, and would then spend the last 4 full years in the low end
segment, gaining valuable market share in a segment that is difficult to penetrate. If this
strategy is used, consider placing the product somewhere around 6.2/13.8. This would
allow the product to enter the fine cut of low end in Jan of year 5.
The major advantages of this strategy is that it takes advantage of the fact that you can
sell a lot more units in low end than any other segments, and with max automation, you
will make a lot of money with this product. The biggest money maker in the game is
typically the low end segment. The other advantage of this strategy is that the product
doesn't need to be moved at all for the entire game, no R&D will be needed! The
disadvantage is that it will have a bad first year, and bad fourth year. Overall, this is a
strategy that isn't used often, but we see tremendous upside potential in it.
V. Other Strategies
On occasion, we have recommended adding a second product to one of the wing
segments. This strategy is usually recommended when three competitors have left a
segment and you do not anticipate them to return. The problem with this strategy is that
competitors think alike. When the players in a segment are down to 3, at least one of
those three will launch another product and it is quite possible that 2 or 3 new products
inundate the segment, creating an oversaturation of the market and thus making it a bad
choice for your new product.
B) Segment by Segment Strategy
This section offers an overview of the strategy for the entire segment (allowing for
crossover analysis when products drift into new segments). This segment does not cover
the specific decision-by-decision strategy that should be used in round 1, which will be
covered in the next section, entitled Round 1 Strategy.
Our experts chose to employ a segment by segment strategy instead of opting for a
product by product strategy because while general strategy for products may change, the
overall strategy for a segment remains the same. If you are looking for the general
strategy for a new product that will be launched, we recommend that you review the New
Products section above and refer to the general strategy of the segment where it will be
introduced. This should give you a great portrait of the products path to success. .
Page19
I. Traditional
Buying Criteria:
Ideal Age: 47%
Price: 23%
Ideal Position: 21%
Reliability: 9%
The Traditional Segment is the most important and often the most complicated in
Capstone. Any strategy that is implemented must have at its root the objective of keeping
the product as close as possible to the ideal age since it represents almost half the Survey
Score.
General Strategy
The Overall Strategy for the Traditional Segment is to introduce a second product as
early as possible (most likely by drifting the High end product during round 3 or by
launching a new product to begin in the segment), to slowly allow the current product to
drift to the low end segment which it will enter in the fourth round. You should then
introduce a 3rd product in round 3 or 4. Since you will be losing one of your traditional
products to the low end segment, it is important that you gain at least 2 products, because
this is a very large segment that is very profitable. To do this, you will need to drift your
high end product in year three, and to create another product to enter the traditional
market in round 3. This allows you to have two products in each of the two large
segments, Traditional and Low end. Depending on the moves from the other teams, we
typically recommended having a third product in traditional as well.
R&D
The specific year-to-year strategy involves moving all products that are in the segment so
that they get R&D'd when they are in the 2.4-2.9 years range (however, the product that
will be drifted to the low end segment should not be R&Dd at after the third year) This
ensures that the product vacillates between a range of 1.2-2.9 years (which is less than
one year from the ideal age). You should always strive to have the product R&D'd at 2.7
years of age so it splits to 1.35 years and then gets slowly closer to the ideal age. If the
product will remain in the Traditional segment for the entire game, then you should move
the product down and to the right and try to situate as close to the ideal position as
possible. Remember that the most important buying criterion for this product is the age.
As soon as the second round starts, there can be more clear-cut strategy. Every game is
different, and every team will face different opponents who attempt to use different
strategies. The overall strategy for this turn should again be focused on getting a very
quick R&D cycle which will allow the product to split in age quickly. Keep in mind that
Page20
the products you will be creating this turn will not enter the market until 14-18 months
from now. That means that this product must be competitive in this segment for this
entire round and at least one more round before it can begin its move to the low end
segment.
The strategy suggestions below should only be used as guidelines, and when considering
what moves to make, you must always consider whether or not new products are being
launched, whether products are being moved in or out of your segment.
As long as you are moving a product into this segment by the third round (which we will
recommend you doing with your current high end product), we recommend a move to
5.7/14.3 in the second round. If all goes well, this will be this products last move for the
duration of the game. The forecasting for the second round must be done while taking
into account all factors. While it is anticipated that you will sell between 1250-1500
units, there are many factors which could influence your decision. Your product will
have an end of year December survey score of approximately 50. If you do not anticipate
that any other products will be moved or launched in your segment, you can anticipate to
get roughly 1650 units in sales. In the vast majority of situations, there are new products
that enter the market as of Round 2. These can enter the market in two ways: they can be
created, or they can be moved from another segment. To help you predict if products are
entering, please review this section.
By the third year, your product will be situated in both the low end and traditional fine
cuts (make sure to price accordingly). It will remain in the Traditional fine cut for 6
months and will slowly exit it. Priced correctly (approx. $21-$22 your product will sell
about around one thousand units, about 600 in the traditional and 400 in the low end
(again, these are rough predictions and depend on a variety of factors which you must
analyze when coming up with your forecast figures).
For the 4
th
-8
th
years, your product will no longer sell any units in the traditional segment.
The product will sell many units in the low end and by the 5 and 6
th
year it will be a
dominant player in that segment and will be very profitable. There are many factors that
will affect your sales in the low end segment. Please review the forecasting section to
properly assess the sales potential for this product for these rounds.
Reliability
In round 2 or 3, reduce your MTBF to 14000. After the fourth year, when the product
has drifted into the low end segment and will not be getting any traditional sales, drop the
MTBF to 12000.
Price
You will notice when doing Price/Profit comparisons using the Marketing Spreadsheet.
that the ideal price appears to always be situated at the top end of the fine cut (ie. $29.50
in round 1). In our opinion, price wars are extremely rare in this segment, and there is no
Page21
real value in reducing the price much lower than the top end of the fine cut. Our
recommendation is that you set the price at the top or near the top of the fine cut, and
reduce it every turn by 50 cents. You will see that most other teams will price their
product at or near the top of the fine cut. Even if they do not, this does not mean that you
must adjust your strategy. We strongly recommend that even in a "price war" in this
segment, the price of your product should never drop below $2 under the upper limit of
the fine cut. There is absolutely no reason to sacrifice that much margin for minimal
gains in sales.
For the product that is being moved to the low end segment, the transition year pricing is
important. You need to make sure to price it within both fine cuts. We recommend
somewhere between $21-$22. This will make your product attractive in the traditional
segment and will give you enough sales in the low end to be a profitable product.
Promo
The overall strategy for Promo is to get to 100% awareness in 3 turns without spending
too much in the first two rounds (when profits will typically be at their lowest). The first
two turns, the promo expense should be $1,750 and in the last round it should be $1,500
which will maintain the level at or near 100%. After that, you simply need to maintain a
level of 1,385 to keep the level at 100%.
Sales
Remember that Accessibility applies to the segment and not to the product. The overall
strategy for Sales is to spend $2,000 per turn on each of your first 2 products. This will
gradually move your accessibility to 100%. If you get to the point where you have three
products, the sales budget should not need to exceed 1,500 per product until you hit
100%. Once you reach 100% accessibility, drop the Sales level to 3,300 in total for the
segment. This means it should be 1,650 per product if you have two products and 1,100
per product if you have three products.
Automation
This is very important to this segment and it should be automated as soon as possible.
We recommend highly automating your initial traditional product as it will be drifting to
the low end segment and will only be moved twice all game. You should automate it to 8
in the first turn and to 10 in the second turn. Newer products that enter the segment
should be automated up to a level of at least 6.5 or 7. See automation section for more
details.
Issues
The complications with this segment lay in the fact that the ideal age is 2, and therefore
the product cannot be R&D'd every year. There will come a point in years 4-8 where you
will have to do a three turn analysis to see how best to take advantage of the ideal age.
Page22
II. Low End
Buying Criteria
Price: 53%
Age: 24%
Ideal Position: 16%
Reliability: 7%
The low end is the highest volume of all the segments and must be managed well in order
to achieve success. Students often engage in Price Wars in this segment and attempt to
take away sales units from other. However, it's important to note that what your
competitors do does NOT affect your product's appeal (but it will affect your sales).
General Strategy
The overall strategy is to invest in Sales and Promo, max out on automation, reduce
MTBF, reduce the price, and to make money on volume.
R&D
Most teams have absolutely no idea how to maneuver the low end product to maximize
its profitability. Weve seen teams try to move the product really early, only to have a
terrible product for the next 4 years. Weve seen teams move the product in the second
or third year, only to have to move it again in the 7 or 8
th
year (R&D is very expensive
when the product has a high level of automation). None of these are good strategies.
After much research, weve discovered that the proven ideal move (assuming TQM is
enabled) is a move to 4.7/15.3 at the beginning of the fourth year. This means that the
product only needs to be moved once in the entire game. This also means that the
product can capitalize on a high age when splitting, keeping it close to the 7.0 ideal age.
*If TQM is not enabled, you need to move the product in round 3, which will be a 26
month move, and the number will not necessarily be 4.7/15/3.
The great thing about the low end segment is that products do not need to be located
close to the ideal spot in order to be successful; they must simply be inside the fine cut.
When the game begins, the product is located at 3.0/17.0 and is 4.6 years old. The
product needs to get older in order to gain appeal. If the product is not moved, it will exit
the fine cut in July of the fifth year. Since we cannot have the product exit the fine cut,
we must move it before then. At the beginning of the fourth year, the product will 7.6
years old. If your automation is maxed out at 10.0 (which it should be), and assuming
TQM is enabled, the R&D project for your product will likely take 16-18 months, which
means a perfect release date of June/July of the fifth year. Once it is moved to 4.7/15/3,
it will remain in the fine cut until the last few days of the eighth year, where it will very
briefly exit the fine cut. This means that your product will have spent its entire life in the
fine cut and will only have been moved once, and optimal strategy if we've ever seen
one!
Page23
Reliability
Drop the MTBFs to 12,000 in the first turn and leave it at that level for the duration of
the game. This is not the segment that you want to be differentiating your product by
being reliable. Consumers in this segment would rather see less reliable products for sale
at cheaper prices. Reduce the price instead and drop the MTBFs.
Price
You will want to begin with a small price drop to $20.00 or $20.50. You cannot go any
lower because it will affect your margins. After the first round your product will have
serious automation, as will most of your competitors. Expect a price drop from your
competitors, and be prepared to drop your own price to the $18 range. Similar $1 or 50
cent drops over the next few years should not only keep your product competitive, but
should guarantee that your margins are astronomical (well over 50%) and your sales
volume remains high. At some point in rounds 4 or 5, you may see benefits in dropping
your price significantly (use the marketing spreadsheet to learn the effects of price drops).
If this is the case, you must make sure to sell out and drop your price accordingly.
Promo
The overall strategy for Promo is to get to 100% awareness in 3 turns without spending
too much in the first two rounds (when profits will typically be at their lowest). The first
two turns, the promo expense should be $1,750 and in the last round it should be $1,500
which will maintain the level at or near 100%. After that, you simply need to maintain a
level of 1,385 to keep the level at 100%.
Sales
The overall strategy for Sales is to spend $2,000 per turn on your product until the second
product enters the segment. If you keep spending $2,000, in the year before your second
product enters the segment, you will be at or near 70%. In the year after the second
product enters the segment, you will see a jump to 80%. In the following year, reduce
your spending to $1,800 in each product, this should get you very near the 100%. Once
you reach 100%, drop your sales level to $3,300 for the segment, or 1,650 per product.
Automation
Automate to 10 in the first turn and do not touch for the rest of the game. If you canno
get to 10 in the first round, go to 9, or 8, or whatever number you can afford, and raise it
to 10 in year 2.
Issues
The major issue for this segment is going to be the pricing. You will be tempted to drop
your price significantly in order to gain market share. Run some quick simulations to see
how this will affect your bottom line. Remember that since this unit is costing you little
to produce, every dollar drop in price is a huge hit on the margins, much more so than in
higher priced segments.
Page24
III. High End
Buying Criteria
Ideal Position: 43%
Age: 29%
Reliability: 19%
Price: 9%
The high end segment has fewer variables than the traditional and low end segments.
The price will be steady throughout, as will the MTBF's. The only thing you must
concern yourself about is the R&D.
General Strategy
The strategy in this segment is to make small moves in the first two years to keep the age
down and to introduce a new product in the first or second year to be launched at or
ahead of the ideal spot on its launch date. By making small moves in the first two years,
your product will be first to market and will gain from being the best product for a
significant amount of time. This will then allow you to move or drift the current High
End product to the traditional segment, where there is a much better chance of selling
more units. After that, the new product will remain as the only product in the High End
segment and will be move annually to keep up with the ideal position and the low age
requirements.
R&D
Make a very small R&D move in the first year (8.1/11.9) and second year (8.0/12) with
your current High end product. It will sell very well in the first year, and respectable
sales in the second year (375-475 units). Create a new product in the first or second year.
It is very important that this product gets created at the latest in the second year. Follow
the new product guide to see where it should be launched. Once the product is launched,
follow the same guidelines to see how it should be R&Dd. The moves should be
relatively simple and straightforward. They should involve nothing more than a yearly
move down and to the right to keep up with the drift.
You will notice that since the segment drift is more pronounced in the High End segment,
that you will experience difficulty keeping up with the drift. This will especially be true
if your automation is at or near 7. This is not a big cause for concern. Simply move the
product along as far as you can and do not worry if you arent able to keep up with the
ideal positioning. Your product will suffer a slight bit because of location, but all your
competitors will have the same problems as and you will not lose many sales as a result.
When you create the new product for launch in the third year, this allows you to drift
your original product to the Traditional segment. At the beginning of the third year, your
High End product will be about 1.8 years old and will be situated inside the fine cut for
both Traditional and High End segments. It will quickly exit the fine cut for High End,
Page25
and as a result it will only sell about 50-75 units in this segment during the third year.
During this year, do not R&D the product. The age will go from 1.8 to 2.8 and the
product will sell a fair amount of units to the traditional segment. Depending on the
number of competitors that have entered the market, you will sell between 850-1200 units
in this turn. Assuming 9 or 10 competitors, you will sell about 850 units. If there are still
only 5 competitors, you may sell up to 1200 units. If you are expecting somewhere in
between that amount, you can adjust your forecast and your production accordingly.
Remember to forecast for your worst case scenario, not the number of units you think you
will sell.
In the fourth year, you will need to make a very slight move (8.1/11.9) to reduce the age
quickly. This R&D should take about 3 months to complete. During this year, you will
likely have the best product on the market and will sell well over a thousand units. Your
end of year survey score will be 55-60, and your competitors should be in the dust.
Depending on the number of competitors, you will sell from 1150-1600 units. You will
sell about 1150 with 10 competitors and 1600 with 5 or 6 competitors. These numbers are
guesses which should not be counted on. For proper forecasting methods, please make
sure to visit the forecasting section.
In years 5-8, simply move the product along as much as you can down and to the right
while keeping in mind that the most important factor is to R&D products when they are
in the sweet spot of age 2.4-3.0. This product should be among the best sellers for the
duration of the game.
Reliability
When creating the new product, it doesnt need to be ultra reliable, average MTBFs is
fine. Once youve set the new products reliability at 2250, do not adjust it for the
duration of the game. In fact, some of our experts believe that reducing the MTBF's to
the lower end of the fine cut is an acceptable strategy that will help out your bottom line.
Either strategy is good, and choose the one that you prefer.
With the drifting product, it will be very important to adjust your MTBFs in the
transition year. At the beginning of the third year, make sure to adjust your MTBF to
14000, which is the lower limit of the traditional segment. Since you will no longer be
selling the product to the High End segment, there is no real use in having the MTBFs
that high. Since it will become a traditional product, and since reliability is not important
in the traditional segment, reduce it to the bottom limit of the fine cut.
Page26
Price
Always price the High End products at the upper limit of the fine cut for that segment.
In the third year, when your High End product will be transitioning to the traditional
segment, make sure to adjust the price to $28.50. This will render the product attractive
in both segments and will give you the ever important cross-sales to the High End
segment, along with maintaining high margins throughout.
Promo
The strategy for this product is to have at least $1,500 in the first year, and to slowly
increase that in the second and third years to $1,750. This should get you at or near the
100% level, which you can then maintain with a yearly expenditure of $1,385.
For the product that you will be launching, you should begin with a $1,750 and continue
with that expenditure until the awareness hits 100% and then reduce it to $1,385.
Sales
The strategy is to begin with $1,750 and to maintain that level for the first three years.
Remember that the sales budget depends on the amount spent in each segment. The goal
is to spend this amount until there are multiple products. Once the new high end product
in on its own (the original product has drifted to the traditional segment), increase this
amount to $2,000 to maintain the high level created by the dual products.
Automation
Make yearly increases to the automation level until it reaches 6.5 or even 7.0 (or even
higher if TQM is enabled) and then stop automating.
IV. Performance
Buying Criteria
Reliability: 43%
Ideal Position: 29%
Price: 19%
Age: 9%
This wing segment always seems to cause grief to some teams. Almost every single
game, you will see at least one team leave the segment completely. We strongly
recommend that you maintain a strong presence in this segment. It is a very easy
segment to forecast and maintain. While the profits may be scarce early on, the two wing
segments end up being some of the most profitable in the later rounds, especially once
teams start bailing.
Page27
One of the obvious issues with this segment is the fact that Reliability is so important,
and as a result, you must increase the MTBF's to the maximum in the first turn. This
move will eat away at the profit margins, but proper automation, and timely departures of
your opponents will more than make up for the early troubles.
General Strategy
The overall strategy is to maximize the MTBF, charge at the top end of the fine cut, and
to R&D the product every year to next year's ideal spot. It's that simple. A reasonable
sales and Promo budget will guarantee you a strong position. Where you will distance
yourself from your opponents in this segment is in your ability to forecast and to predict
your opponent's departure from the segment.
R&D
Move the product every year to next year\s ideal spot. However, if the R&D date is
August or prior, you will need to adjust this strategy, as this means your product is
getting released outside the fine cut.
Reliability
Set at 27,000 in the first round and do not touch for the rest of the game.
Price
Charge at the top end of the fine cut and reduce by 50 cents per turn.
Promo
Spend at least $1,500 in the first turn and then increase to $1,750 for the 2
nd
and 3
rd
turns.
This should get you to 100% after which you should spend $1,385 annually.
Sales
Spend $1,500 in the first year, and increase to $1,750 in the second year and then spend
$2,000 on sales for every year after that.
Automation
Automate to 5 in the first year and then increase to 6.5 or even 7 in year two and 3.
V. Size
Buying Criteria
Ideal Position: 43%
Age: 29%
Reliability: 19%
Price: 9%
Page28
General Strategy
The other wing segment has a very similar strategy to that of its partner, Performance.
Since the ideal position is the most important criterion, it is very important to make
moves every year to keep up with the segment drift. The major problem with this
segment is that the starting spot is so far away from the ideal spot, and the first year move
must be a big one in order to keep pace. Some teams will surely attempt the first to
market strategy, and will outsell your team in the first round, but the team who makes a
big move in the first round will have the better product for every single round after that,
as other teams will not be able to catch up to the segment drift. As a result, we
recommend a big move in the first round, even if that means fewer sales for that round.
This segment will also be unprofitable for the first year and perhaps even for the second
year. At that point, it is quite common to see teams exit the segment, which causes the
remaining teams to gain some serious market share followed by some serious profit. We
strongly recommend that you maintain a strong presence in this segment. It is easy to
forecast and maintain, and eventually it will reap big profits.
R&D: Move the product every year to next year's ideal spot. However, if the R&D date is
August or prior, you will need to adjust this strategy, as this means your product is
getting released outside the fine cut.
Reliability
Sit is not necessary to incur costs to reduce the MTBF. However, if the team would like
to cut costs, the MTBFs can be reduced as of the second year.
Price
Charge at the top end of the fine cut and reduce by 50 cents per turn.
Promo
Spend $1,500 in the first turn and then increase to $1,750 for the 2
nd
and 3
rd
turns. This
should get you to 100% after which you should spend $1,385 annually to maintain the
100% level of awareness.
Sales
Spend $1,500 in the first year, and increase to $1,750 in the second year and then spend
$2,000 on sales for every year after that.
Automation
Automate to 4 in the first year and then increase to 6.5 or even 7 in year two and 3.
Page29
C) A/R Strategy
The Accounts Receivable policy is the amount of time you allow your customers to pay
for your product. Longer period means increased demand for your product. The default
period when the game begins is 30 days. At 30 days, each of your products' survey
scores are reduced by 8%. At 60 days, the survey score is only reduced by 1.5%. This
means that increasing the A/R policy from 30 to 60 days equates to a jump in survey
scores of 6.5%. This does not mean that your sales will increase by 6%, but nevertheless,
we strongly recommend that you adjust your A/R/ policy to 60 days in the First or second
round.
Let's take a look at the numbers:
An increase in A/R policy to 60 days ties up an extra $8 million in cash annually. This
cash is not lost, it is merely tied up in Accounts Receivables. The cost of capital is
usually approximately 10% early on. This means that your company's actual cost of
adjusting the policy is about $800,000 per year.
In the first year, increasing each of the products survey score by 6.5% will have
important effects.
Low end: from survey score of 24 to 25.6, which equates to an increase in sales of 1.3%
Traditional: from survey score of 41 to 43.7, an increase in sales of 1.3%
High end: from survey score of 18 to 19.2, an increase in sales of 1.1%
Performance: from survey score of 42 to 44.7 an increase in sales of 1.4%
Size: from survey score of 45 to 47.9, an increase in sales of 1.0%
Overall, this would lead to an increase in sales of approximately 1.3%.
Based on a rough projection of 130 million in sales in the first round, this 1.3% increase
leads to an increase in sales of 1.7 million. At 30% margin, this equates to
approximately $500,000 in profit. While this does not make up for the cost of the policy,
we feel that since the sales are being taken away from competitors, that this move makes
sense. The main reason why we encourage this move is that valuable points can be
gained in both market share and in product appeal. Another reason that we recommend
the move is that the gains may very well be more significant in future years as product
margins increase significantly. We recommend that you adjust your A/R policy very
early on, preferably in the first turn or in the second turn, however if you feel the cash
position does not allow it, we strongly recommend making the move in the second year.
If you do not adjust youre A/R policy in the first year, make sure to reduce the
forecasted numbers in this guide by 1.3%.
The game also allows you to set the A/R Policy at 120 days, but we do not recommend
this strategy. The relative gain in going from 60 days to 120 days is so minimal, and the
required cash for the policy is so high, that it does not make good business sense.
Page30
* The forecasted numbers in this guide take into account this 6.5% increase in survey
score in the first year and every year thereafter. Adjust accordingly ff you change your
strategy.
D) A/P Strategy
The Accounts Payable policy dictates how long it takes you to pay your creditors. The
longer it takes you to pay them, the more shrinkage your shipments will suffer and the
fewer units you are able to produce. The default period at the beginning of the game is
30 days. At 30 days, you lose 1% of your produced units to shrinkage. At 15 days, you
lose approximately .11%-.15%of your shipment to shrinkage, or one unit for every 700-
900 produced. Again, we strongly recommend that you adjust your A/P policy in the first
round. In fact, if you can only afford to adjust one of the two strategies, you should
adjust your A/P strategy, it's much better for your bottom line.
Let's look at the numbers:
A change in A/P policy to 15 days ties up an additional $4-5 million in cash per year.
Again, this cash is not lost, but it is merely tied up. At 10% cost of capital, the total cost
to your company is approximately $500,000 per year.
In the first year, the policy change would save approximately 45 units in total. The actual
cost of these units is about $20 per unit. Your company is pocketing close to $1 million
with this move for a net difference of almost half a million in the first year! These
savings get bigger and bigger as the game progresses and your production levels increase.
This decision really is a no-brainer, and it should be done immediately in the first round.
The game allows you to adjust the A/P policy to 0 days, where there would be absolutely
no shrinkage. We do not recommend that you make this move, because as discussed with
the A/R policy, this would tie up too much cash for the nominal gain.
Page31
E) Human Resources Module
In most simulations, the human resources module is turned on in the 2
nd
-4
th
rounds.
There are only a few decisions that must be made every turn, and they are simple.
Complement: this lets you decide how many workers you want to employ for the year.
This decision must be entered at the very bottom of the production sheet. You will see a
cell entitled needed complement and right next to it, you will have to enter a number
complement. What you must do is enter the number that is required in the needed
complement cell, otherwise you will face additional charges and reduce efficiency. This
is very well explained in the Capstone manual, but in short, if you do not have the full
needed complement, you get overtime, which brings on higher turnover, reduced
efficiency and higher costs. More importantly, you will lose points for having high
turnover.
Recruitment and training: Enter $5,000 for recruitment and 80 for training. Over the next
few rounds, you will see your turnover rate go down and you will also see your
productivity increase significantly. This will reduce your labor costs and reduce your HR
costs to replace departing employees. Again, the Capstone Manual does a great job of
explaining these factors in detail. The effect is cumulative, and if you want to get full
points, you need to spend on recruitment and training.
F) TQM
TQM is one of the most forgotten yet important aspects of the simulation. It is usually
activated by your profs in the 3-5
th
years. It allows you to greatly reduce your costs and
increase your demand thus increasing your sales. It also allows you to R&D products a
lot quicker. There are 10 total initiatives in which you can invest. Every one of them is
important and will have a beneficial impact. Every one of them represents a very positive
NPV (Net Present Value) Investment Opportunity. The reason that all of them are so
positive is that once the money is spent and the gains are accumulated, they do not
disappear, they remain present for the remainder of the game, even if you do not spend
anything further.
The important factor with TQM is that the expenditure is expensed, not capitalized. That
means that every dollar you spend this year will be reflected on your Income Statement.
The expenditure is not depreciated over 10 or 20 years, whatever is spent this year goes
as an expense against your income.
In the first year, spend $1,500 on each initiative for a total of $15 million. It may seem
like a lot of money to pay up front for a few percentage points in savings, but it must be
done and you will be happy with the results in the long term. In the first year, you will
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save about 8.5 million in costs from the TQM investment and you will gain about $3
million in sales. You almost get all your money back in the first year alone.
In the second TQM year, spend the same $1,500 across the board (or even increase your
spending to $1,750). This will give you roughly 11.5% savings in material, 13.5%
savings on labor, 40% R&D savings time, 60% reduction in admin costs and 14%
demand increase! This will generate immediate savings of close to $20 million plus
additional sales of 7-12 million and will allow you to increase your automation up to 7 or
even 7.5 for your wing/high end products. This in turn will generate higher margins
which will again create more revenue.
In the third TQM year and for every year thereafter, we recommend spending $1 in each
of the initiatives. This will give you a slight increase but nothing significant (spending 0
gets you absolutely nothing, but spending $1 surprisingly gives you several hundred
thousand dollars in savings!). After two years, you will notice that the returns on the
TQM investments have disappeared, you have reaped your rewards and any additional
investments would not render themselves profitable. Also, you are getting full points at
this point for reducing your costs, so you can now focus on building profits. The returns
begin to diminish and there is no value in spending another $1,500 per initiative. You
will continue to get the very large savings that you have accumulated. After this year,
continue spending $1 on each of the 10 initiatives (for a total of $10), you will see
nominal gains every year. You will continue to save well over $20 million per year, and
get additional sales every year because of the investments.
G) Advanced Marketing
The Advanced Marketing module is usually activated in the 4-th or 5
th
rounds, but many
instructors choose not to activate whatsoever. We've seen some profs activate it in the
very first year, which causes all the forecasts in this guide to be inaccurate. It can seem
to be quite complicated, but in fact it isnt. What you will notice with this module is that
keeping awareness in the 90%-100% range will become very difficult. Both the
Capstone manual and the online module contain detailed information about Advanced
Marketing. There is nothing much that the Capsim Experts are able to add aside from
what you are able to locate in the two guides. Just remember that you should spend your
money where it will have the most impact, and you should try to keep the amount of
spending consistent from round to round. Basically, dont feel obligated to make serious
expenditure increases just because your awareness will go down. You must remember
that all your competitors will go through the same reduction in awareness as you will, and
the diminishing return concept applies here too. As an example, you should spend the
following:
Low end: $700 on print, $800 on direct, $1 on web, $1 on email and $300 on trade shows
Trad: $700 on print, $800 on direct, $1 on web, $1 on email and $300 on trade shows
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High End: $1 on print, $400 on direct, $250 on web, $500 on email and $300 on trade
Perf: $1 on print, $1 on direct, $500 on web, $600 on email and $300 on trade
Size: $400 on print, $1 on direct, $500 on web, $600 on email and $1 on trade
H) Labor Negotiations
Instructors typically activate one or two rounds of labor negotiations, it is therefore
important that you know when these will take place. Read both the manual and the
online module, as there is much information with respect to this online. The key to
remember in this module is that you will likely have very high automation at the time
when you enter into negotiations. Therefore, you will want to increase your starting
position to reflect this. Remember that if your price is higher than that of your
opponents, you can easily cause a strike, which reduces their production, eliminates most
of their HR gains, and causes them to lose points. In the first round of negotiation, you
should offer a significant increase in your starting price across the board. We're very
hesitant to give advice on what to do in these labor negotiation rounds, because again,
there are so many variables in play, and every game is different. However, just
remember that if you have the highest automation, your opponents will be hurt much
more than you will be if there is a wage increase. Also, don't hesitate to raise the offers
considerably (over $30 is not unheard of). However, if you do so, expect the other
groups to have strikes, which will cause shortages in their products, and increased sales in
yours, so forecast extra units and product accordingly!
4. Round 1 Strategy
Before we delve into the round 1 strategy, if is very important that you remember that
these numbers are based on hundreds of simulations that we've run, and are an
approximation of the worst and best case scenarios. It happens that a team will do worse
that these numbers and it happens that a team will sell out. We cannot make any
guarantees with respect to these projections, but we can tell you that these numbers
reflect the most common sales results from the combination of R&D and sales and promo
decisions. Feel free to adjust them however you wish, and remember that what your
competitors do will greatly impact these numbers. Good Luck!
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A) Traditional
R&D product to 5.6 14.4
MTBF: Leave at 17,500
Price: $29.50
Promo: $1,750
Sales: $2,000
Forecast: 1,300 units
Produce 1413 units. Since you will lose 2 units to shrinkage and since there are 189 units
in stock, this will give you a total of 1600 units.
Analysis:
R&D
The current product is very old (3.1 years old). It must be moved as quickly as possible
so we can split that age in half. We also see that positionally, it is situated on the October
ideal spot. This explains the small and simple R&D. The quick R&D is the best way to
get the age down to a manageable number as quickly as possible. You will note that
many teams will opt for a strategy of moving the product way down and to the right.
This is a mistake, as the only thing you need to worry about in year 1 is getting the age
down.
MTBF
Although we want to drop the MTBF to 14,000, this is not the time to make this move.
In this turn, the most important factor is to get the age down as quickly as possible, and
dropping the MTBF to 14,000 adds several months to the R&D completion date, meaning
that you have a bad product (3.5+ years old) on the market for that much longer. Leave
the MTBF's as is for now, we will deal with them in round 2 or 3.
Price
As discussed in the overall strategy, the price in the traditional segment should always be
near the upper limit of the fine cut. This allows the product to make a hefty profit
margin, and will not make your product suffer enough for you to notice any losses in
sales. We suggest about $1 short of the fine cut limit as a great point of reference.
Sales and Promo
As discussed in the overall strategy, your sales budget should be $1,750 this round and
your promo budget should be $2,000. This will raise your awareness to 78% and your
accessibility to somewhere around 70% (remember that this factor depends on total
money spent in segment).
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Forecast
You may be asking yourself why the sales will jump from 961 in year 0 to over 1300 in
year 1. There are several factors that explain this jump.
1. The segment grows at a rate of 9.2% per year. It will sell 8,067 units in round 1.
2. In round 0, the segment lost 1,620 units to products from the low end segment.
Because of the drift of the segments, these products will be less appealing in round 1, and
as a result, products from the low end segment will only take 460-600 units in sales. This
leaves Approximately 7,550 units for the 6 major products (an average of 1,260 per
product). If all your competitors make the exact same move as you, you will sell
approximately 1260 units in round 1. This will not happen. Teams do not know how to
R&D their product in round 1, and teams will make errors. It is possible that one or two
teams make the same moves as you, but we routinely see teams employing our strategy
sell between 1400-1600 units. Remember, we are the Capstone Experts.
3. Your product will likely be the very first to market. This means that for several
months, your product will be significantly better than all of your competitors and you will
be getting a high percentage of sales during these months. This also means that once
your product splits in age, it will also have a much better age cycle through the ideal age
(see chart below)
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
3.10 3.18 3.27 1.72 1.80 1.88 1.97 2.05 2.13 2.22 2.30 2.38 2.47
You will note that your product passes through the ideal age in July, and never gets
further than half a year away from the ideal spot. This will also ensure that your product
will be among the best on the market for the second half of the year.
Your end of round 1 December survey score will be in the high 30's or low 40's (likely 41
or 42), and you will likely have one of the highest scores.
4. Your Sales and Promo expenses will likely be higher than your opponents which will
give you a larger portion of the market.
5. Some of your opponents may make serious calculation errors and you may end up
getting additional stock out sales. When a competitor stocks out their additional sales are
proportionally divided among the remaining competitors according to their current survey
score.
6. You will get some cross sales to the Size segment, approximately 30 units.
There are several factors that may cause you to sell more or less than your forecast, but
on average, you will almost always sell 1400-1600 units in round 1.
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Production
As discussed in the overall strategy, you should produce approximately 1.25 times your
worst case scenario. Since we have compiled much data on the first round, we can advise
you that it is quite rare for a team to sell more than 1600 units. In this case, we
recommend producing for a total of 1600 units.
B) Low End
R&D: none
MTBF: Reduce to 12,000
Price: $20.00
Promo: $2,000
Sales: $2,000
Forecast: 1,850 units
Produce: 2282 units. With shrinkage, this will produce 2279 units, plus the additional 39
in stock and this will give you 2318 units (1.25 times your worst case scenario).
Analysis
It is very important that you understand the risks and rewards and potential dangers in
this segment. For example, we've had customers who've reported to us that the sold less
than 1850 units in the first round because all of their competitors dropped their prices to
the $18 range. Everyone lost money in this segment, and as a result, they didn't meet the
worst case projection. We've also had the opposite happen, where no one dropped their
price, and the team sold out. This is a very volatile segment that is extremely difficult to
predict. If you think your classmates will drop their prices immediately, feel free to
reduce the forecast and production. The above numbers are averages and are by no
means guarantees.
Margins
The reduction in MTBF will save you 60 cents per unit, which helps to explain why you
can drop the price by a full dollar without seeing your margins change much. The
reduction in price of 50 cents will make you product much more appealing than the
equivalent cost of having 14,000 MTBF. The margins are not that good in the first round
for this product, but you make up for it in volume. Next round, with a solid product and
very good automation, you will make a lot of money in this segment.
Forecast
Forecasting this segment is the most difficult in the entire game. Your competitors can
make drastic moves which will seriously affect your market share. In our experience,
teams do not make drastic moves in the first turn. Most teams will elect for a simple
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approach, either keeping the price current or reducing the price by 50 cents. Most teams
will not spend 2000/2000 on Sales Promo, which helps explain your increased market
share.
Also, you will be getting between 70-100 sales of your product to the traditional segment.
It is important that you factor these into your calculations.
With the above moves, your survey score will be 25 or 26. Most teams will have survey
scores of 14-22. While this segment is difficult to forecast, in our experience, you should
finish with approximately 2,000 units in sales. If you are playing exclusively against
computers, increase your forecast slightly, as they tend to spend less on Sales and Promo
early on and will have survey scores in the mid teens. Trust us, we are the Experts!
C) High End
R&D: 8.1/11.9
MTBF: Keep at 23000
Price: $39.50
Promo: $1,500
Sales: $1,750
Forecast: 525 units
Produce: 617 units. With shrinkage, this will produce 616 units, plus the additional 40 in
stock and this will give you 656 units (1.25 times your worst case scenario).
Analysis
There are two basic strategies that can be employed in the High end segment. One is
described above, and the other is to make a very big move with the High End product to
the 9.2/10.8 range. This move takes the entire calendar year to complete, but will set the
team up for future years. This move is very expensive and it causes loss of sales in the
first year. We feel that the small move gives the product enough appeal for it to survive
the first two or three years while the new product is being developed. We also feel that it
is very important to get a second product in the traditional segment ASAP, and the most
efficient way to do that is to move the product from the high end segment to the
traditional segment. This explains why we recommend the small move strategy while
launching the new product.
The sales will be greater than 1/6 because your team will be first to market. The more of
your competitors that decided to employ strategy #2 (move to 9.2/10.8) the more sales
you will get, and the more teams that decide to use your strategy, the less sales you will
get. In our experience, there are typically 4 teams that will move to product, and 2 that
try to be first to market. You may also see teams immediately move their product to the
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traditional segment, which is a mistake in our opinion. If none of your competitors
choose to adopt your strategy, you will likely stock out.
Performance
R&D: 10.4/15.3
MTBF: Increase to 27000
Price: $34.50
Promo: $1,500
Sales: $1,500
Forecast: 425 units
Produce: 453 units. With the additional 78 in stock and this will give you 531 units (1.25
times your worst case scenario).
Analysis
It is very important that you maximize the MTBF in the first round. Failing to do so
could cost you as many as 15 survey score points, which could result in hundreds of units
remaining on the shelves. Your survey score will be in the low 40's. Two or three other
teams will likely take the same approach as you, while some may begin leaving the
segment. Some may simply chose not to spend as much on Sales/Promo and as a result,
you will certainly get more than 1/6 of the units. We are also accounting for an
additional 30 or so units for the cross selling of your units to the high end segment
Size
R&D: 4.7/9.6
MTBF: Keep at 19000
Price: $34.50
Promo: $1,500
Sales: $1,500
Forecast: 340 units
Produce: 363 units. With the additional 62 in stock and this will give you 425 units (1.25
times your worst case scenario).
Analysis
This segment typically loses 120-170 units to products in the traditional segment in the
first year. This means that there are only 2200 units left for the other 6 products. This is
the only segment where we are forecasting less than 1/6 of the market, and that can be
explained by the fact that we will be last to market. However, it's quite possible that two
or three other teams elect to choose this method. It's also possible that teams will invest
significantly less Sales/Promo (choosing to abandon the segment), which will make our
product much more appealing. Expect to sell about 375 units.
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F) Capacity
In the first round, cash is always a problem as you want to do much more than you can
afford. The designers of Capstone have clearly taken this into account when setting up
your factory. The best solution is to sell off unneeded capacity. This allows you to spend
that newfound cash elsewhere in your production line, to increase automation, which will
generate huge profits for you in the future. Your factory currently has much more
capacity than it will ever need. In the first turn, you will sell off capacity as follows:
Traditional
Sell 850 units of capacity, leaving you with 950 units. This means that you will be able
to produce 1900 units per turn. In the second round, you may need to produce up to 1800
units, but by the time the third round rolls around, the segment should be swarming with
competitors and you production should drop significantly. In the rare occurrence when
there are no competitors, all is not lost, as you can always buy more capacity later on
(when your cash flow situation is likely to be much better!).
Low End:
Sell 150 units of capacity, leaving you with 1250 units, meaning you could produce up to
2500 units. This should give you ample room to allow your product to grow. Again, it's
always a possibility that your competitors will make mistakes, leaving you with a much
higher market share than anticipated. If this is the case, you can always buy back more
capacity. As well, the nice thing about Low End is that at some level, you can control
how many units you wish to sell. You can do this by raising or lowering your price. If
ever you are short on capacity for a turn, you can always raise your price which will give
you higher margins and a similar profit on a lower sales volume.
High End
Sell 300 units, leaving you with 600 units and capacity to produce 1200 units. Remember
that this product is going to compete for two or three years in High End then it will be
drifted/moved to the Traditional segment. This means that it will absolutely not need
more capacity until at least the 6th year, but in most games, 600 capacity is enough for
the entire game.
Performance and Size
Keep your capacity at 600 for each segment. While you will not need the capacity for
several turns, at some point around the 4th or 5th round you may need the full capacity
and you will likely have to buy some before the 8 rounds are over.
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G) Automation
These recommendations are simple suggestions to take if the simulation allows it.
Depending a several factors, you may or may not be able to purchase all the automation
listed below. If you are able to purchase all of it, great! In fact, if you have cash left over
(the number on the bottom right hand side of the production sheet), than you should
spend all your cash. However, we find that in most games, teams are not able to make all
the purchases listed below. If you cannot afford all of them, simply reduce the trad or
low end automation by a few decimal points, until you are able to afford the investments.
Traditional
Increase the automation to 8. Since the product will not be moving much via R&D, it is a
perfect candidate for automation.
Low End
Max out the automation at 10. The product will only have one movement, and therefore
it should be fully automated immediately. The margins on this product will be well over
50%next round.
High End
Automate to 5, with the idea that all products must be automated until they reach 6.5 or 7.
Performance
Automate to 5, which should improve the horrid margins that this product is saddled with
at the beginning of the game.
Size
Automate to 4.4.
*Remember to invest the maximum allowed in this turn (which is usually around $35
million).
H) Finance
The finance decisions are explained in more detail in the Finance Guide. However, in
round 1, what you need to know is that the cost of long term debt is quite cheap. Your
creditors still believe in you, therefore you should take out as much long term debt as
possible. Depending on the simulation, and the variables entered by your prof, you will
have to raise somewhere between 40 -55 million through on of three avenues, stock
offering, short term debt and long term debt. In the first round, some teams need to max
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out how their available cash. If this is you, simply raise the max allowable cash at each
of the three avenues. What you must remember, which is explained in detail in the
financing guide, is that you should always have between $5-10 million in projected cash
position at the end of the year.
*If the maximum allowable cash still doesn't give you at least a $5 million cushion, you
need to reduce your expenditures (automation) to the point where you have at least this
$5 million cushion.
Since there are many variables, we strongly recommend that you make thee decisions in
conjunction with reading the Finance Guide (located at page 47). It is very important
that you make the decisions based on your teams aversion to risk and your teams
individual situation.
5. Round 8 strategy
In the last round, there are several strategies that can be adopted to maximize profits and
reduce costs. If you were running a real company, these would not be smart business
decisions. In fact, even if you were merely playing out this game for a few more rounds,
we would not recommend these strategies. However, since the game is pre-determined to
last no longer than 8 rounds, we can take advantage of this fact.
R&D
In your 2 wing segments and your high end segment, do not make a full years move with
your R&D. You are essentially sacrificing position in the later years (which will not be
played) by using the first to market strategy. Move your product about 50-65% of the
distance it would normally move. This should allow you to be the first to market and to
reduce the age of your product much quicker. The result of this move will be that your
product will be appealing earlier on. Try this move in all three segments (Size, Perf and
High end). Forecast a bit higher than you normally would because of this fact.
In your traditional product, do not concern yourself at all with product location. In fact,
your strategy for your high end product should have been determined in round 6 or 7 as it
often requires a three-year plan to properly control the age of the product. By the 8
th
round, you probably have an exact idea of when you will move your product, but make
sure it is done with the idea of maximizing the age value of your product.
Sell off capacity
Most teams will benefit by selling off some of their capacity. The truth of the matter is
that Capsim likely sees this as a flaw, but they have tried to mitigate against it by putting
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emphasis on all the rounds, not just the end result. Before selling off any capacity, make
sure that you have a feasible solution for your excess capital. Make sure that the extra
cash will not unbalance your ratios or quotas. At this point in the game, it is highly likely
that your team is meeting all of its profits goals, so more money may not help at all.
Also, make sure that the selling off of capacity does not affect any other points on the
scorecard or on the analysts report. Take a long look at your pro-formas to make sure
that you are not throwing away valuable points. If your pro-forma score improves as a
result of selling off capacity (which it sometimes does) go ahead, we've seen that strategy
employed with success many times!
6. Forecasting Guide
Forecasting is the process by which each segment's projected totals are entered into the
marketing spreadsheet. When forecasting, it is very important that you enter your worst
case scenario forecast into the marketing spreadsheet. This will greatly simplify the
process of deciding how many units to produce (you will always produce 125% your
worst case scenario). More importantly, it allows for a simple method for setting the final
financial numbers. Since you have entered your worst case scenario forecast, the
individual making the financial decisions knows that as long as he leaves a small cushion
($5 million or so) that there will not be an emergency loan because each segment has a
worst case forecast. It should be highly unlikely that a properly forecasted segment gets
fewer sales than its worst case forecast.
Forecasting is the most important part of the game, and it is where teams get destroyed,
and teams make profits. Learning to effectively forecast each segment takes practice, and
the best thing we can suggest for practice in forecasting is to run rehearsals. Below is the
method we recommend when forecasting each segment.
A. Factors to Consider
I. Check the Survey Scores
Look at last year's courier for the segment you are analyzing. Sum up the December
survey scores which will give you your divisor. Calculate your product share of the
segment by dividing your product's survey score with the sum of the survey scores. In
the early rounds, this should be simple enough, but later in the game, there may be over a
dozen products, and since the courier only shows the top twelve products, you may have
to do some creative math to get the actual divisor. All things being equal, this number
should represent your market share for the upcoming year. Multiply your market share
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by the Total Industry Unit Demand for the upcoming year (which can be quickly
calculated by multiplying last year's demand and the growth). All things are not equal,
therefore this number should only be used as a starting point for your further forecasting
calculations.
II. Current state of your product
Take a long hard look at the current state of your product. Is the December survey score
overstated or understated for the upcoming year? For example, if your traditional
product's age is 2.0 at year's end, your product's survey score is overstated, because as
your product gets older, its survey score will drop. Basically, your product has peaked.
However, if your traditional product is 1.4 years old and will not be R&D'd all year, the
score is understated, because your product's score will rise as it approaches 2, and then it
will slowly taper off.
How does your product compare with the ideal positioning? Is your product going to get
further and further away only from the ideal spot to get R&D'd in November of the
current year? The classic example is what seems to always happen in the wing segments.
When you read the courier, your product may well have very recently been R&D'd and as
a result, both its age and positioning are close to the ideal spot. This means that your
score is overstated and will drop in the course of the year as your product gets older and
further away from the ideal position. However, this is generally not a cause for concern
as your competitors will likely go through the same dilemma as you in these segments.
III. What is your product going to be doing this year?
Is there going to be a change in the MTBF? If yes, look at the value of the buying criteria
and make the adjustment accordingly.
Are you going to spending more than your competitors on Sales/Promo? While this is
often impossible to know for certain, after a round or two this can sometimes be quite
clear.
What are you doing with your product's price? This is extremely important in the low
end segments, but almost negligible in all other segments.
Is your product going through a transition year where it must make a big move? Is its age
is in a difficult position?
Are you doing anything to your A/R policy which would cause a large increase in
demand?
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Are the TQM expenditures going to push demand up for your product more than your
competitors?
IV. Are there going to be more or less competitors in the market?
Additional Competitors
If there is likely to be additional competitors, you should assign an arbitrary survey score
to this new product. If you do not know what score to assign to it, give the product an
average score from all the competitive products in the segment (those getting more than
6% of sales). Make sure that you assign a date for when these products will be entering
the segment. By looking at the Revision dates of the different products, you should have
a good idea when the products will be entering the market. Once you have done so, make
sure to give less weight to a competitor who is entering in the December than to one that
is entering in February. If the new competitors are few, you should prepare a spreadsheet
listing the revision dates and showing separate calculations for market share without the
new products and with the new products.
Fewer competitors
If you feel strongly that some competitors will leave the market, you should also have
their Revision date on hand (this will typically only take place in the wing segments).
Let's use the example where one competitor is leaving the segment on April 1st. Run the
current numbers on a spreadsheet and divided the year into two portions, the first three
months and the last 9 months. Calculate your projected sales with all competitors for the
first three months, and then calculate your projected sales for the last 9 months with one
less competitor. Your sales should have gone up significantly.
Drifting products
Keep an eye out for products that are drifting out of your segment. This is specific to
traditional and high end products that drift to low end and traditional respectively. If the
perceptual map shows a product on the brink of the fine cut and you do not feel it will be
R&D'd, drop this products survey score significantly (more than half) to account for the
fact that this product will no longer be in the fine cut.
Moving products
Be aware of products that are likely to be moved out of your segment rather than drifted
out. The most common example is the high end products that are on the brink of the fine
cut between High end and Traditional. Instead of drifting the product to traditional,
teams will often elect to move the product completely out of the High end segment and
closer to the ideal spot of the traditional segment.
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IV. Capacity
Is there enough capacity in the segment to meet the demand? If not, you can adjust your
prices upwards and you will be sure to sell out. The Capstone Guide refers to this
practice and in theory it should work quite well. However, we caution that you be very
careful when using this strategy, as it is possible for a competitor to move his product in
your segment and take up the extra sales, leaving you with little or nothing to gain from
your heavy price increase.
Take it all in
Take all these factors and weigh them against your initial starting point for forecasted
demand. Adjust your starting point up or down according to the list of factors. Since you
have a 25% production cushion in case your product outperforms, you should adjust your
actual projected forecasts down by 5%or so after taking in all the factors to render this
number a worst case scenario.
B) Forecasting Strategies by segment
I. Low End
The low end segment can be considered easy to forecast because there can be no real
surprise entrants in the segment. However this couldn't be further from the truth. The
sheer moves in survey scores that can be controlled by the click of a button (price!)
renders this segment almost impossible to forecast.
The trick with this segment is figuring out what your opponents will do with their price,
and that's what makes this segment very difficult to forecast. Round 1 should be
somewhat easy, and we have set out the forecast for you in the Round 1 strategy section.
Round two is also typically straight forward with some teams making some price
adjustments, but overall the basic forecasting method should work again.
Starting in round 3, you will begin to see additional competitors. Groups who chose not
to R&D their traditional product since the first round will see this product take about 8%
of the market share in the third round with an end of year survey score of 28. Make sure
to be cognizant of these additional competitors. Typically by this point, the prices have
begun to drop significantly and some groups are engaged in a price war.
Round 4 is typically a good round when using our strategy because by now some teams
have begun to R&D their product, and the survey scores have dropped because of this
premature move. As a result, your product should be at or near the top of the segment in
sales.
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Your product will be moved in the early part of round 5, however all other products will
have to move by now as well. As a result, this round should also be a good one under
this strategy. By now your price is probably situated around $15 and your end of year 5
survey score is around 67. Some competitors will continue dropping prices in rounds 6 7
and 8, but during this time, you need to stick to the basics and your forecasting should be
reasonable close every time.
II. Traditional
In the traditional, the most important factor is competitors. The high volume in sales and
the relative ease of entry into the segment will attract multiple products from almost
every team. Every turn, it is important to figure out how many competitors will be
entering the market and when they will be entering.
III. Size and Performance
These two segments are quite straightforward and easy to predict. Simply run the basic
forecasting method and this should be your approximate total for the upcoming year.
Always consider reducing this amount by 5% when entering your worst case scenario if
no other factors are changing. This will give you enough of a cushion if competitors
enter the market.
The only factor that you must consider is competitors leaving the market. If you are
certain that a competitor is leaving the market, produce more than 125% of your worst
case scenario. The reason for this is that some teams may not be aware of this move, and
as a result they will likely stock out, leaving you with the additional sales (provided you
have produced enough units). Very rarely competitors will enter the segment, but you
should be able to foresee these coming by using the method described here.
IV. High End
Forecasting in the High End segment is very similar to the wing segments. You must run
the basic forecasting method and get your preliminary number. Then you must account
for potential departures. However in High End, you will notice that in years 2-5 there
will be an influx of new products being released in the segment. Be aware and watch out
for these products and adjust your forecasting accordingly.
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7. Finance Guide
The finance decisions are always quite simple, as the options are quite limited. The
finance decisions should always be the last decisions you make every round. You should
make sure that all decisions have been made before going to the finance screen in your
Capstone spreadsheet. This way, you know that your forecast as well as all your
decisions for marketing/production/TQM/HR/Advanced Marketing have been taken into
account.
Last of all Decisions
Once all your decisions have been made, open the finance sheet and look at the number
in the cell that shows your cash position for Dec 31
st
of that year. This number represents
how much cash you would have left at the end of the year if all your projections end up
exactly as youve forecasted them. Since you have forecasted for your worst case
scenario, this number should represent the absolute worst case cash position that you may
find yourself at the end of the year. In the first 5 or 6 rounds, this number will always be
negative.
The Cushion
Next, you must decide as a team how conservative you want your approach to be to your
cash position. When our Capstone Experts play the simulations, they typically aim for a
very slim $2-3 million positive cash position at the end of the year. This means that if
their worst case projections come true, the company will have 2 or 3 million in cash left
over. For teams that are starting out, we recommend a 5-10 million cash position. This
amount is often referred to as the cushion. Another method to use is the 5% rule,
which means that you must keep a cushion which equals 5% of your sales. This means
that as the game progresses, your cushion gets larger and larger.
Cost of Capital
The key point that must be considered is that every million in cushion will cost your
company approximately 10-12% in interest. Therefore an additional 5 million cushion
costs your accompany $500,000+ to its bottom line. It is important that your team
understands this point, as we have often seen teams borrow excessive amounts of cash
with the reasoning that they might need it in the future. This is critical mistake, as the
team needs only to concern itself with the amount of cash needed this round. The team
will have ample opportunity to raise more cash next year. It should only concern itself
with the cash needed this year. Raising more cash than necessary is very costly, and
stupid.
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Balancing Risk
The team must balance the risk of having a cash shortage (and a visit from BigAl) with
the cost of carrying the extra cash. This is why we recommend a 5-10 million cushion for
each team 5 million for aggressive teams and 10 million for conservative teams. A loan
from BigAl will cost you over 150 points in the Analysts Report regardless of the
amount. It will cost you significantly less in the balanced scorecard. It will also cost you
an additional 12% on the balance of the loan. All these factors must be considered when
deciding on the cushion. Once the cushion amount has been decided, the team must then
decide on the ways to raise the capital, or in the later rounds, the way to distribute the
capital.
Other Charges
Assume you have decided on a 5 million cushion. Your current projected year end cash
position is -25 million. The quick math tells us that you would need to raise 30 million.
However with each additional million that is raised via debt, there is an interest charge of
approx 11% that must be paid annually. There is also a 5% brokerage fee on all long
term debt (bonds) that is issued. Therefore, to raise 30 million net with debt, you would
need to get loans for several million more, depending on the debt breakdown. Long term
debt interest rates are always 1.4% higher than the short term debt rates. If you choose to
raise the money via equity (stock offering), you will not have to pay interest on the
amount of equity raised, however you will have to pay a 5% brokerage fee to issue the
stock.
Ratios
The rule of thumb is that you want to have about 2.4 times more debt than equity. This
means that your Debt-to-Equity ratio would be 2.4. You will get full points awarded if
you are between 1.8 and 2.8. The reason that you want to aim for a higher ratio is that
the more leveraged your company is, the more profit you will make on the debt. This is a
simple corporate finance principle. Your leverage should be lower when you plan on
having little profits, and it should be much higher when you plan on generating more
profits than your cost of interest (10-12%). Early on, you will make little to no profits, so
you should have lower leverage. Once you make more than 12% return, than you should
be more leveraged.
For example, if I borrow $9 at 11% interest and invest $1 on my own money, and my
investment generates 20% return, I will have made $2, paid $1 in interest, and I'm left
with $1 net profit on my $1 invested (100% return). However if I only generate 3%
return, then I make 30 cents profit, pay $1 in interest, and lose 70 cents overall.
For more information on this principle, simply do a quick internet search, but for the
purposes of this exercise, you need to know that more leverage means more profits in
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profitable years, and more losses in unprofitable years. Since your company will be
making large profits in the later rounds, leverage is good!
Many clients ask us why we are raising so much debt. A question we often get is "Isn't
debt bad?" The answer is quite simply, NO! Without debt, companies cannot succeed,
and in our case, without debt, we would not be able to purchase automation, spend on
TQM, sales and promo. These expenditures generate a loss in the first few years, but
provide huge returns later on. Without debt, these huge profits would not be possible.
Ask any CEO, and they will tell you that a certain level of debt is important and required.
Just remember that in this game, that level is 1.8-2.8 debt-to-equity ratio.
In our example, assuming you need to raise about 35 million, which means about 25
million in debt and 10 million in equity. When deciding on how to split up your debt
between short and long term, the main concern is the working cap ratio and the days of
working cap. Once you have entered these three numbers, check the pro-forma numbers.
If your Debt-to-Equity ratio is a bit low, this means you need more debt. Therefore you
need to convert some of your equity to debt. If the reverse is true, simply issue more
stock and less debt.
If your days of working cap is dangerously close to 90 days, simply convert long term
debt to short term debt. If the days of working cap is close to 30 days, do the opposite,
convert short term debt to long term debt.
Limits
Every round, the creditors will place a limit on how much stock you can issue and how
much debt you can borrow. As a result of these limits, you may find yourself maxing out
in certain areas and having numbers that are not ideal. This is not critical, provided you
maintain your ratios within the prescribed limit. In some rounds, you may find your
leverage to be very close to the 2.8, and even over the 2.8. What you must balance is the
cost of losing a few points to leverage versus the cost of not having those plant upgrades.
Use the Pro-Formas
The great thing about doing the financial numbers is that the pro-forma sheets give you
all the important information that you need to make sure you are getting your full points.
What you will end up doing every turn is playing with the numbers, tweaking all three of
these amounts and coming up with a perfect mix for each round. We cannot understate
enough the importance of using the proformas to see how your changes will reflect on
your company. If you do not have access to your proformas, use an older version of
excel or contact Capsim, it is that important
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Round by Round strategy
In the first round, you should have something like 45 or 50 million raised. These numbers
are not critical, provided that the ratios all work and provided that the cushion is one that
your team is comfortable with.
In the next few rounds, you will continue to expand your plant at a very quick rate, and
you will likely have large TQM expenditures which will necessitate a lot of cash. As a
result, you will be raising a lot of money in rounds 2-5. In fact in some of those rounds,
you may very well be raising the maximum amount of cash in either equity, short or long
term. By the time round 5 or 6 rolls around, you should have a well established
production line which is providing you with huge margins and generating revenue. You
may still need small amounts of cash, but it will be limited.
In the 6-8
th
rounds, you will likely have very hefty profits and little plant improvements.
As a result, you will not need to raise any cash, but you will need to distribute some of
that additional cash. Again, when redistributing cash, you need to be aware of your ratios
and how they are affected by different moves.
Distributing Cash
There are 4 ways to spend the additional cash: 1. Pay dividends 2. Buy back stock 3.
Retire Current debt 4. Retire Long term debt. The two first options reduce the amount of
equity, and the last two reduce the amount of debt. Paying dividends drives stock price
up, as stock price is indicative of Book Value, last two years Earnings Per Share (EPS)
and last two years dividends.
Paying dividends in these years is very important, because it will drive you stock price
up, which will drive your market cap and provide you with valuable points in your
evaluation. However, when issuing dividends, you never want to pay more than your
projected EPS, because stock holders see this as a reduction of necessary equity. Paying
dividends is very important, even in years where the EPS isnt especially high. The rule
of thumb is that you should pay 50-75% of EPS through dividends. Even if this means
paying a 10 cent dividend, make sure you do it, your stockholders will be happy!
With respect to the rest of the extra cash, reduce the debt at a rate that will keep your
ratios within prescribed limits. Since you have 4 different options, there is no reason why
you cannot keep your ratios at their ideal spots every round. Remember to fiddle with the
numbers and to look at the pro-forma sheet to see how your adjustments affect your
ratios.
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8. Important Information and FAQ
A) Understanding the Survey Score
The survey score is the best tool you can use to help you with your forecasting. It gives
you an immediate picture of how the products will sell in the upcoming year. When you
open the Capstone Courier and see the reports for each segment, the last column on the
right will always be the December Customer Survey Score. This tells you exactly how
many units each company sold in the month of December. To find this out, simply add
the total of all Dec Survey Scores and divide that number by each product. This will give
you the percentage of sales for each product, which you can then compare to the total
sales for the segment to get to projected total sales.
It's important to remember that survey scores are only adjusted every month.
B) How do I decide how many units to produce?
We recommend you employ a strict set of production rules whereby you produce 1.25
times the units of your worst case scenario. This guarantees that you will always make
your ratios and you will never lose points for carrying too much inventory. It's the ideal
amount of risk to carry when considering the reward. Resist the temptation to over
produce for a "what-if" scenario. You may have the occasional stock-out, but overall,
your company will be much healthier and much leaner if you stick to the 25% rule.
C) Understanding Product Moves with Ideal Spots
Every segment has an ideal position which is different at any moment of the game. The
segments drift over time downwards and to the right, bringing their ideal points with
them. This means that the ideal points drift slightly downwards and to the right every
month (they are only recalculated once every month). When considering where to R&D
a product, it is important to consider this factor.
When you are R&D'ing a product, you must always move a product to a point that is
somewhere on the ideal point diagonal line that runs from the top left to the bottom right
of any segment. Countless mistakes have been made by teams that accidentally move a
product off the ideal point diagonal. If you move your product off the diagonal, you are
adding unnecessary distance between your product and the ideal spot. This is a mistake
that can easily be avoided by looking at this easy to use chart. This chart outlines the
ideal points for each segments for each of the 96 months in the 8-round game. If your
Page52
potential new R&D spot is not on this chart, then you have made a mistake and you must
find the correct spot using the chart.
*To remember where the ideal diagonal line is, have a point of reference. We suggest
10.0/10.0. What you need to know is that the ideal line diagonal is a perfect diagonal
with a slope of -1. This means that for every 1 that the perf goes up, the size goes down
by the same amount. Examples of points along the ideal diagonal are: 9.5/10.5; 5.0/15.0;
13.3/6.7 etc.
Since you can only move a product once per year, it is very important that the product be
R&D to a spot that minimizes the distance between the product position and the ideal
position. An ideal move is one where the product spends exactly half the year ahead of
the ideal spot, and half the year trailing the ideal spot. This would mean that the product
is never more than 6 months away from the location of the ideal spot. This is often not
possible in the wing segments or the high end segment, but this should be considered
when looking at the traditional products. Try moving the product half a year ahead of the
ideal spot, which will make your product competitive for 12 straight months (6 months
leading up to the ideal spot, and 6 months as the ideal spot is moving away from your
product)
D) Understanding Reliability
Reliability is a fairly simple concept to understand. It is measured in MTBF, which stand
for Mean Time Before Failure, but that is irrelevant. All you need to know is that the
higher number means a more reliable product. The range of the fine cut for each segment
is 5,000 hours. Each increase of 1,000 hours of MTBF equate to a 30 cent increase in
material cost for that product. This means that offering the maximum MTBF in a
segment (compared to offering the minimum) effectively costs the company $1.50 per
unit. In one segment (performance) it is better to have the maximum MTBF and to raise
the price, but in all the others, it is much better to reduce the MTBF's and to reduce the
price, thereby offering a more attractive product for the same end price. Or even better,
reduce the MTBF's and not reduce the price!
Another important factor when considering MTBF is that drifting products need to have
their MTBFs adjusted. For example a product that drifts from the High end segment to
the Low end segment will need to have the MTBFs dropped from 23000 to around
17000 and eventually to 14000 and to 12000 once its in the low end segment. Many
teams forget to adjust the MTBF when shifting a product over and the result is an
increased unnecessary cost, or loss of sales.
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E) Understanding Automation
Automation is the process by which people are replaced by machines, which causes the
labor cost to go down. There are a few important things you need to know about
automation.
1. Every point of automation reduces labor costs by 10%.
2. Automation costs $4.00 per point per unit of capacity. This means that automating the
high producing segments (low and trad) are significantly more expensive than automating
the lower producing segments.
3. Every point of automation increases (in a non-linear fashion) the time it takes to
complete an R&D project. You can complete almost any project in one year as long as
automation doesn't exceed 6.5. When automation reaches 6.5, you will notice that you
are not able to move products along as far as you want to, and your R&D projects will
have to be slightly shorter.
What does this mean?
1. R&D the low end product to the maximum of 10 as soon as possible.
2. R&D the traditional product up to 8 in the first round and then get it to 10 by the third
or fourth round because it will be drifting for the last 4 rounds
3. Do not R&D your High End, Performance and Size products much higher that 7 (If
TQM is enabled, you should be able to automate to 8, while keeping the ability to R&D
the product significantly).
F) Understanding Capacity
Each product line has a capacity to produce a certain amount of units on the first shift,
and can produce the same amount of units on the second shift. A capacity of 500
effectively means that your factory can produce 1000 of those units (500 on the first shift
and 500 on the second shift). Capacity must be purchased a full year before it can be
used. The importance of this cannot be understated, as you must train yourself to foresee
capacity shortages a full year before they happen.
In theory, you only want to produce on your first shift due to the increased labor charges
for the second shift. However, with the heavy automation strategy that we recommend
using, the labor costs are significantly reduced, therefore the additional 50% labor
charges are greatly reduced and almost negligible.
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There is no reason why a company should buy more capacity if it can fulfill the demand
by using the second shift. For example, you do not need more capacity for a demand of
600 units if you have a first shift capacity of 500, because you can produce 1000 units!
The only time you should be considering adding capacity is when you feel that your first
and second shifts (running at 100%) will not be able to meet the demand for the
following year. It can be quite tricky to foresee demand a year in advance. However,
begin by looking at your current production, and multiply that times the segment growth.
Does this number exceed your maximum capacity for next year? Also, consider whether
products may be exiting the segment, especially in the wing segments (performance and
size).
After considering all the factors you feel that demand for you product may surpass your
production next year, you need to purchase it now. Remember that each unit of capacity
allows for double production (ie. You only need 700 units to meet demand of 1400 units).
Make sure not to purchase more capacity than you need, because as you will see buying
extra capacity with high automation is very expensive.
G) Using the Marketing Spreadsheet
By entering in different prices and jotting down the effects of the price on sales, you can
gain valuable insight by using the Marketing Spreadsheet in Capstone. While it is clear
that the computer forecast that is shown in this sheet is wholly inaccurate, the forecast
can be used as a barometer of the affects of pricing on your potential sales. As you may
have read in the Capstone Guide, while the Computer prediction does not take into
account what the competitors will do, it does give you a very good idea of what will
happen to demand when you change the price, and can therefore be used as an indicator
of percentage change in sales according to price.
To illustrate this, enter different prices of $14.50 -$24.50 in the low end segment and take
note of the computer prediction for your sales. If you want to have a much clearer
picture, open a spreadsheet and enter the prices along with the computer predictions.
Then calculate the percentage change with each 50 cent drop in price. Substitute the
computer's prediction at 24.50 with your sales prediction at that price, and you will be
able to see what happens to your sales numbers when you reduce the price accordingly.
With your newfound information, you should be able to run quick calculations in your
excel spreadsheet as to which price will likely have the highest profit.
Page55
H) What are Cross Sales and How do I account for them?
Cross sales are sales of a product that is primarily selling in one segment to consumers of
a completely different segment. Most of the cross sales happen in the first round, below
are some examples which are all taken from the first round:
-Low end products will sell 70-100 units each to consumers of the traditional segment
-Some traditional products will sell 2-12 units to consumers of the low end segment in
the first round
-Traditional products that have been moved to the 5.6/14.5 range will cross sell
approximately 25-50 units to the high end consumers
-Performance products will sell 20-30 products to the high end segment each but usually
not more than 150-175 for the entire segment.
-Traditional products will sell 10-40 products in the Size segment and this number will
usually be around 150 units for the entire segment.
Cross Sales also happen when a product is being drifted to another segment. It is
important to price correctly, have the right MTBF and to have enough production for
sales in both segments during these few turns when a product can be somewhat
competitive in two segments.
I) Spotting a Product that is Switching Segments
When teams decide to move a product from one segment to another, it can be done in two
ways.
a) one very large move: This move will almost certainly span two years. To spot
these, turn to the 4th page of the Capstone Courier and see if you can find any Revision
dates that run into the following year. They should be relatively easy to spot because
their revision year will differ from all other revision years on the page. We can tell you
from experience that almost all moves that require more than 12 months of R&D will be
moves from the wing segments to the Traditional segment. Lesser frequent are moves to
the Low end segment, and moves from the High end to the Traditional segment.
b) two small moves: If a team chooses to make the move from one segment to
another over the course of two years in two separate moves, again, you should be able to
spot these. Simply open page 11 of the courier and take a glance at the perceptual map.
Are any of the products located in between two segments? If yes, they are likely being
moved to the new segment.
Sometimes a team will attempt to make a slight adjustment so other teams will not pick
up on this. Be weary of these moves. If a team moves a product in the opposite direction
of the segment drift (ie. anything but down and to the left) they are switching segments.
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J) Figuring out where a New Product will be Launched
Trying to decipher where an opponent's new product will be launched is a difficult task,
but with a little bit of time and patience, it can be figured out. Every year, make sure that
you look at page 4 of the Capstone Courier, and see if you can notice any new products
being launched. They should be relatively easy to find, as they will be listed in the 6th,
7th and 8th slots of each team below the products that you know and recognize. You will
also notice that they will have names that are unfamiliar to you. Once you have spotted
these products, you will notice that no information is provided other than the Revision
Date and capacity/automation. However, even with this little information, you should be
able to decipher where your opponents are launching their product.
Looking at the Courier from Round 1, you see a product ("Clip") that has a release date
of July 28 of year 2. Next, open your Capstone Rehearsal spreadsheet and enter all the
R&D decisions from team Chester from the first round. Once you have done that, create
the product Clip, and begin entering different coordinates/MTBF. You will quickly see
that it could not possibly be a low end product, nor could it be Size or Performance
because the release dates cannot possibly match a July 28 release date. You try a few
more combinations and eventually you will see that Clip is being launched at 10.1/9.9
with 22000 MTBF. Within 2 minutes, you have discovered that there will be an
additional product in the High end segment next turn, and you are now able to account
for it.
If you do not have time for running these simple simulations, try looking at how the team
has spent their Sales and Promo money to see if this can give you any indication. Teams
will typically not reduce their spending on Sales below 1,500 if they plan on entering a
new product.
You can also look at capacity/automation for the new product. If the capacity is very
high (600+) you are probably looking at a product that will be launched in Traditional or
Low end. However if the capacity is very low, they may be launching a new wing
product or a High end product. Keep in mind that depending on the date of release, some
teams will elect not to buy much capacity this turn, and will instead focus on buying
capacity next turn. If a new product has very low capacity or a very late release date, you
should not give it much weight while doing your forecasting.
K) Product Naming Tricks
If you are up against human opponents, try this neat little trick. When you are launching
a new product, give it a name that will overtly deceive or confuse your opponents into
thinking that it is being launched in a different segment. Assuming you are Andrews and
you are launching a High end product, consider naming it ASize or ATrad. Your
opponents will either think that it is being launched in those segments. Some may very
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well sniff out that trick and fail to fall for it. Alternatively, try naming it something like
Able2 or Aft2. This is more subtle, and your opponents may think that you are launching
your product in a completely different segment.
L) Price Wars
While you may be panicking and worried about a potential Price War, you need to be
aware that every product in the game has its own individual survey score (appeal).
Whatever the competitors choose to do does not affect your product's survey score. The
only impact this will have is to reduce the market share of your product, but the impact
may not be as much as you think. Let's take a look at an example in the low end segment
(because most price wars take place in this segment).
Name
Market
Share
Units
Sold to
Seg RevisionDate
Stock
Out
Pfmn
Coord
Size
Coord ListPrice MTBF
Age
Dec.31 PromoBudget
Sales
Budget
Customer
Aware-
ness
December
Customer
Survey
Acre 17% 2,410 3/14/2014 3.0 17.0 $18.50 14000 8.6 $1,375 $2,000 100% 34
Ebb 16% 2,357 9/1/2014 3.0 17.0 $18.50 12000 8.6 $2,000 $1,484 100% 30
Cedar 16% 2,346 11/28/2014 3.0 17.0 $18.50 12000 8.6 $1,575 $2,362 94% 30
Dell 12% 1,753 10/21/2014 3.0 17.0 $20.50 15500 8.6 $2,300 $1,718 100% 22
Bead 10% 1,479 5/27/2013 4.5 15.7 $20.00 14000 4.6 $1,700 $1,012 100% 20
Feat 9% 1,355 9/21/2015 3.0 17.0 $21.00 12000 8.6 $1,800 $1,807 100% 17
Eat 8% 1,236 1/8/2013 5.1 15.1 $19.50 13000 5.3 $2,000 $1,484 100% 21
Baker 4% 577 1/27/2013 5.5 15.1 $21.00 14000 4.0 $1,700 $1,012 100% 10
Able 3% 389 4/27/2011 6.4 13.6 $22.00 17500 4.0 $1,375 $2,000 100% 8
Cake 0% 47 12/15/2013 7.3 12.7 $25.50 15000 1.3 $1,575 $2,250 95% 0
Edge 0% 2 12/19/2013 8.4 12.5 $26.50 14000 1.3 $2,000 $742 100% 0
Here we see that all competitors priced their product at $18.50 or higher. Ebb was really
worried that Acre would do something drastic and drop their price by $1 or even $1.50.
They were worried that they would lose several hundreds of unit sales. This couldn't be
further from the truth. Let's see what happens to the survey scores if Acre had dropped
their price to $17.00:
Name
Market
Share
Units
Sold to
Seg RevisionDate
Stock
Out
Pfmn
Coord
Size
Coord ListPrice MTBF
Age
Dec.31 PromoBudget
Sales
Budget
Customer
Aware-
ness
December
Customer
Survey
Acre 22% 3,099 3/14/2014 3.0 17.0 $17.00 14000 8.6 $1,375 $2,000 100% 43
Ebb 16% 2,246 9/1/2014 3.0 17.0 $18.50 12000 8.6 $2,000 $1,484 100% 30
Cedar 16% 2,235 11/28/2014 3.0 17.0 $18.50 12000 8.6 $1,575 $2,362 94% 30
Dell 12% 1,658 10/21/2014 3.0 17.0 $20.50 15500 8.6 $2,300 $1,718 100% 22
Bead 10% 1,392 5/27/2013 4.5 15.7 $20.00 14000 4.6 $1,700 $1,012 100% 20
Feat 9% 1,281 9/21/2015 3.0 17.0 $21.00 12000 8.6 $1,800 $1,807 100% 17
Eat 8% 1,144 1/8/2013 5.1 15.1 $19.50 13000 5.3 $2,000 $1,484 100% 21
Baker 4% 533 1/27/2013 5.5 15.1 $21.00 14000 4.0 $1,700 $1,012 100% 10
Able 3% 355 4/27/2011 6.4 13.6 $22.00 17500 4.0 $1,375 $2,000 100% 8
Cake 0% 45 12/15/2013 7.3 12.7 $25.50 15000 1.3 $1,575 $2,250 95% 0
Edge 0% 2 12/19/2013 8.4 12.5 $26.50 14000 1.3 $2,000 $742 100% 0
Page58
While there is no doubt that Acre's survey score went up, none of the other products had
any change in their survey score. The only difference is the market share of each
product. In the first example, Ebb was bound to get approximately 30/193 or 15.6% of
the market share. When Acre dropped their price, this caused the denominator in the
equation to change, Ebb will now get approximately 30/201 or 14.9% of sales. The
difference is only .7% in sales or approximately 100 units.
*What you must remember is that when competitors drop their prices, this does not affect
your survey score. However, dropping your own price will greatly increase your survey
score in low end, and can be used effectively to sell many more units than in any other
segment. Once your automation is at 10, we recommend pricing your low end product
lower than usual, with the objective of selling out your maximum capacity. This can
sometimes mean dropping the price by $1-$3.
M) How many units will I be able to produce in the first year of my product's life?
To figure this out, multiply the full capacity (including both shifts) times the percentage
of the year in which your product will be sold. For example, if your product is being
released on Sept 1st with a first shift capacity of 500, the maximum amount of units you
will be able to produce and sell in that first year will be 333. This calculation equals both
shifts, multiplied by the number of months that your product is available[(500*2) *
(4/12)].
If you are wondering how much capacity you will need in your product's first year, the
process is simple: disregard the release date and simply account for how many units the
product would sell during a fictional full year. In he same example as above, if I feel that
my product would sell 900 units in a full year (given all the buying criteria and
awareness/accessibility), then I need to purchase 450 units of capacity. It's that simple.
If you are interested in the math, quite simply, 900 units in a full year = 300 units in four
months. To be able to produce 300 units in four months, you need to have capacity to
produce 75 per month (or 37.5 capacity for first shift). 37.5 capacity for first shift per
month = 450 units capacity in twelve months.
The rule is simple: When launching a new product, purchase capacity to produce enough
units to sell for that product in an entire year, regardless of how long the product will be
out.
Page59
N) What does a typical turn look like?
We would recommend that you build a habit of always taking the same steps in every
round, that way you ensure that nothing is missed and all the bases are covered.
Step 1: R & D
* If TQM is enabled, you should always begin by punching on $1,500 in each of your
TQM initiatives. This will give you much more accurate R&D dates, and will save you
the hassle of coming back to review your dates after you've punched in your TQM.
Every product needs to be examined when looking at your R & D. By now you have
decided on your overall strategy for each segment and you have decided that your low
end product will only need to be moved once during the entire 8-round game. That means
that in 7 of the rounds, you will be not be doing any major R&D to your low end
product.
Step 2: Marketing
There are four decision sub-sets to this second step (Price, Promo, Sales and Forecast).
The promo and sales decisions are global decisions and should have been decided prior to
the first round. Those decisions are typically easy. The Price and Forecasting decisions
are interrelated and are the two most important decisions in each round.
Step 3: Production
There are two major parts to this step. First you must decide how many units to produce,
and next, you must decide on which plant improvements to make. If the HR module is
turned on, you must also make sure that you have entered the correct amount of staff to
produce your units.
Step 4: HR
This decision sets must be entered before the financial numbers are done in order to make
sure that all factors are considered when making the ever important financial decisions.
If the module is not turned on, you will not have any decisions to make here.
Step 5: Finance
This is where you decide how to get your needed cash, debt (short term or long term) or
equity (stock).
Step 6: Review
Page60
Before finalizing your set of decisions, we recommend doing a quick review. You
should:
Make sure that all your R&D completion dates are in the current year and do not
spill over into next year (unless you are doing a two year product move)
Make sure that your prices are not outside the pricing fine cut (remember the price
drops by 50 cents every round)
Make sure your workforce complement is accurate (this number changes anytime
you adjust your production schedule)
The last thing you should check before submitting your decisions is the number
that is listed as "Cash position - Dec 31 next Year". Make sure this number
matches the cushion that your team has decided on (we recommend 5-10 million)
O) What will the computers do?
If you happen to be playing your simulation against one or more computers, you will find
this section very helpful. Over time, we have been able to see a pattern to the behavior of
computers throughout different simulations. As a result, weve compiled a specific
behavior pattern for each of the 6 computers that you may be up against.
Andrews: The Andrews team will focus on the diagonal consisting of Low End,
Traditional and High End segments. They will attempt to keep costs down and charge
less for their products. This team will introduce products in the High end segment and let
their products drift to the Traditional and Low end segments. Expect them to introduce a
new High End product every two years, and expect them to retire the Low end product as
it exits the fine cut. They will retire the two wing segment products over time.
Baldwin: The Baldwin team will also focus on the Low End, Traditional and High End
segments. They will likely move the two wing segment products to the Traditional
segment. Expect that move to start as of year 1 or 2. Expect the current traditional
product to drift to the Low End segment, and expect them to introduce a new product in
the High End segment in year 3-5, leaving them with at least 2 products in each segment.
Chester: Chesters strategy is less obvious, but they typically employ a simple strategy
that maintains a presence in each segment and will typically not create any new products.
They rarely have a dominant product in any segment, but they will often have the lower
priced product in every segment.
Digby: Digbys strategy is similar to Chesters in that they will keep a product in every
segment, but they tend to differentiate the product by increased sales and promo and as a
result will price at the higher end of the spectrum. Digby will typically create one two or
three products, one in each of the wing segments and the High End segment.
Page61
Erie: Erie will focus on Low and Traditional segments. They will bring the two wing
segment products to the traditional segment, and will allow both the high end product and
traditional to drift to new segments but will not introduce new products at all. They
typically charge lower than average for their prices.
Ferris: Ferris will focus on the Wing segments and the High end segment. They will
phase out the low end product after it runs its course and will move the traditional
product to one of the wing segments (usually Performance). They will create 3 new
products, one for each of Size, Performance and High End segments. They will usually
be priced above average and will not engage in price wars.

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