To get started go to your “Getting Started “screen and scroll down to Practice rounds.You are expected to complete at least 6 rounds (preferably 8)You must follow the Cost Leader with a Product Life Cycle focus (copy attached)When you complete your decisions for each round, send me an email telling me your decisions are ready for processingI will process your decisions and give you feedbackAt the same time you are responsible for reviewing your Fast Track reports to determine how your company is doing for you self.You can use this information to make better decisions on the next round.In the practice rounds you can ask for “se backs” at any time. That is, if you make a big mistake that you cannot manage your company out of, you can ask to be set back to an earlier round to make any corrections, This will not be possible in the competition rounds,here is a check list that you might find helpful before finalizing your decisions:PRACTICE ROUNDS CHECK LISTTo change age, you can make a SMALL change in size OR performanceYou should start a second product in round 1Your new product should be ready for sale as early as possible in year 3You should order capacity and automation in year 2You should increase your automation as fast as you can afford.You should issue stock to keep your leverage between around 2You should always use current/short term debt.Use long term debt to finance new products and/or automationDo not retire stock or pay dividends until your company is in a strong cash positionWatch your Customer Survey rating Carefully –you should be at least above averageWatch your stock price – you should be at least above averageIf you have an emergency loan, getting it paid off should be your first priorityYou should never have more than three products,Watch your credit rating – aim to keep it BB or higherKeep your products within the low and high-tech circle—you do not want two products competing for the same marketAttached is a copy of the Andrews: Cost Leader and Product Life cycle strategy along with decision guidelines for the first three rounds (years)Attached as well is a copy of the answer sheet for the Situation Analysis. Compare your work to this file.Simula0on Quiz Answer Sheets
Quiz 1
Quiz 2
1. If you or your team decides to introduce a new
sensor product, when should capacity and
automa=on be purchased?
Answer: B
2. The promo=on budget affects:
Answer: A
3. What is the minimum amount of =me that it
takes to invent a new sensor?
Answer: C
4. Which one of the following is NOT one of the
four product characteris=cs that R&D can set?
Answer: B
5. The rela=onship between promo=on and sales
budgets and sensor sales is generally…
Answer: B
6. If your short-‐term interest rate (the rate on
your current debt) is 12.1%, then your bond rate
(the rate on your long-‐term debt) is:
Answer: C
7. At the beginning of the simula=on, how many
assembly lines are there?
Answer: B
8. The Finance Department can use which of the
following methods to acquire capital for company
ac=vi=es?
Answer: A
9. How can assembly lines double their capacity?
Answer: B
10. When the prac=ce rounds are over (both
individual and team) the simula=on will be reset
so that real compe==on can begin among the
teams Each management team will take the reins
of…
Answer: A
1. When a segment’s product supply
exceeds demand, how much appeal, to the
customer, will a product priced $1 above or
below the segment price range lose?
Answer: B
2. The 2 market segments learned in the
Founda=on® book are the following:
Answer: C
3. What is a market segment?
Answer: A
4. What’s the measure for product
reliability?
Answer: C
5. How much do segment price ranges fall
each year?
Answer: E
6. Age, price and ___________ criteria
remain constant from year to year.
Answer: B
7. Which of the following are not
considered in the Fine Cut?
Answer: B
8. Inside each fine cut circle,
Answer: A
9. The Low segment’s ideal spot is
Answer: C
10. Last year your company built 1,500,000
units of product Able and sold 1,405,000.
Amer 12 months in R&D, a revision of
product Able is due out tomorrow, on
January 2 (the first business day of this
year). What will happen to the unsold
inventory of 95,000 units of “old” product
Able?
Answer: D
Quiz 3
1. Which market segment places the most
importance on price?
Answer: C
2. If you are marke=ng to High Tech
customers, which criteria are most
important to them in order of importance?
Answer: A
3. A change in MTBF affects:
Answer: C
4. If you purchase produc=on capacity and
automa=on:
Answer: C
5. Based on the example in the Team
Member Guide, what addi=onal awareness
does a promo=on budget of $1,500,000
buy?
Answer: C
6. An increase in promo=onal budgets has:
Answer: C
7. Assuming no addi=onal product promo=on,
what percent of customers, reached through
last year’s marke=ng campaign will carry over
into the current year?
Answer: C
8. If you sell all of the capacity on a produc=on
line, inventory from that line is sold at…
Answer: B
9. If the previous year you reached 100%
customer awareness in your company, this
year what will you need to do to maintain this
level?
Answer: E
10. In a seller’s market even pathe=c products
are snapped up by desperate buyers because…
Answer: C
COST LEADER WITH A PRODUCT LIFECYCLE FOCUS STRATEGY
This practice exercise will help you understand the relationships between business
strategy, tactics, functional alignment, and the Foundation simulation. We will use the
Andrews Company for this example. (During the practice rounds, each company is
assigned a different strategy.)
You will execute your plan by inputting the decisions described below. At the same time,
your competitors will execute their assigned plans. The practice exercise will take three
rounds As each round is processed, you will evaluate the results and then input the next
round’s assigned decisions.
Upon completion of the practice rounds, the simulation will be reset to the beginning.
You can then create and implement your own strategic plan for the actual competition.
Executive Summary
The Andrews team will adopt a Cost Leader with a Product Lifecycle Focus strategy,
concentrating on the High Tech and Low Tech segments. We will gain a competitive
advantage by keeping R&D costs, production costs, and raw material costs to a
minimum, enabling us to compete on the basis of price. Our “product lifecycle” focus will
allow us to reap sales for many years on each new product we introduce into the High
Tech segment. Products will begin their lives in the High Tech market and mature into
Low Tech products before they are retired and their assets harvested.
Vision Statement
Reliable products for mainstream customers: Andrews’ brands offer value. Our primary
stakeholders are bondholders, stockholders, customers, and management.
Research And Development (R & D)
We will introduce a new High Tech product every two years and retire our Low Tech
product when it becomes obsolete (falls outside the Low Tech segment circle). We will
ultimately have a steady stream of products lined up along the leading edge of the High
Tech segment, trailing edge of the High Tech segment, and trailing edge of the Low Tech
segment.
Marketing
We will maintain awareness and accessibility in our targeted segment. After we establish
our cost leadership position we will revisit our situation to decide whether sales and
promotion budgets should be reduced or if we should keep pace with our competitors.
Our prices will be lower than average.
Production
We will significantly increase automation levels on products we intend to keep for more
than three years and spend the money necessary to set– up highly automated plants
for our new products as they are launched. We will sell off the plants for products that
become obsolete as opposed to repositioning.
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Finance
We will finance our investments primarily through long-term bond issues,
supplementing with stock offerings on an as needed basis. When our cash position
allows, we will establish a dividend policy and begin to retire stock. We are not adverse
to Leverage, and expect to keep assets/equity (Leverage) between 2.0 and 3.0.
PRACTICE ROUND 1
Follow the decisions below. After the practice rounds are complete and the competition
rounds begin, you are free to choose a different strategy; you are not obligated to
continue as a Cost Leader Product Lifecycle Focus.
R & D Round 1
Able – Reduce reliability (MTBF) to reduce material cost. Example: Reduce MTBF from
21000 to 17000. Do not reduce MTBF below 17000 hours, because that is the lower
limit of acceptable MTBF for High Tech customers.
New Product – Launch a new High Tech product, with a project length less than 2 years
(no later than December of next year). Example: Name: Adam (replace the first NA in
the list), performance 9.9, size 10.1 and an MTBF of 24000.
Important: Under the rules of the simulation, the names of all new products must have
the same first letter as the name of the company.
Important: Make certain the Able project completes during this year, before December
31st. Under the rules, a new project can only begin on January 1st. If a project does not
complete before the end of this year, you cannot begin follow-up project next year.
Perceptual Map from the Research & Development
Spreadsheet: Product names in black indicate the
product’s current location, names in magenta indicate
the product’s revised position (with slight revisions, the
names will overlap). Names of newly invented products
appear in magenta.
Marketing Round 1
Able – Make moderate cut in price, but maintain promotion, and sales budgets.
Forecast sales as a moderate decrease over last year because the age of the product
is causing it to lose appeal among High Tech customers. Example: Price $33.00,
promotion budget $1000, sales budget $1000. Forecast sales of 1250 units.
New Product – No change required because the product will not emerge from R&D
until next year.
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Production Round 1
Production schedules will plan for eight weeks of inventory. That is, have enough
inventory on hand to meet demand eight weeks beyond the sales forecast. This
requires a 15% inventory cushion (8/52 = 0.15). For example, suppose Marketing
forecasts demand at 1000, and you have 100 units in inventory. You want 1000 x 115%
= 1150 available for sale. Since you have 100 on hand, you would schedule 1050 for
production.
If you cannot meet demand, sales go to competitors. Therefore, you want to plan for
the upside as well as the downside. Your proforma balance sheet will forecast about
eight weeks of inventory. You hope that your actual sales will fall between your sales
forecast and the number of units available for sale.
For each product, schedule production using the formula:
(Unit Sales Forecast X 1.15) – Inventory On Hand.
Able – Increase automation level by 1.0 point.
Make no other plant improvements to capacity or automation at this time.
Important: There is a one year lag between purchase and use of new capacity and
automation for both new and existing products.
Finance Round 1
Your fiscal policies should maintain adequate working capital reserves to avoid a
liquidity crisis. Working capital can be thought of as the money that you need to
operate day-to-day. In Foundation working capital is current assets (cash + accounts
receivable + inventory) – current liabilities (accounts payable + current debt). If you
run out of cash because your sales are unexpectedly weak, an Emergency Loan
will be issued. Here are some guidelines to help you avoid an Emergency Loan.
Your proforma balance sheet predicts your financial condition at the end of this
year. Make conservative sales forecasts. Do not rely on the benchmark prediction.
Override it with a forecast of your own. If you are conservative, it is unlikely that your
worst expectations will be exceeded. Next, build additional inventory beyond your
conservative expectations. This forces your proforma balance sheet to predict a future
where your sales forecast comes true and you are left with inventory. (If you sell the
inventory, that’s wonderful.) On the Finance spreadsheet, issue stock, bonds or current
debt until the December 31 Cash Position for the upcoming year equals at least five
percent of your assets, as displayed on the proforma balance sheet. This creates an
additional reserve for those times when your worst expectations are exceeded and
disaster strikes.
As you gain experience with managing your working capital, you will observe that the
guidelines above make you somewhat “liquid,” and you may wish to tighten your policy
by reducing cash and inventory projections. That is fine. The better your marketing
forecasts, the less working capital you will require.
Match your plant investment (which you will make for the new product next round)
with a long-term bond. If you do not have sufficient new bond debt capacity, issue
stock to cover the shortfall.
Pay a dividend between $0.50 and $1.00.
Do not issue current debt.
Save decisions by selecting “Update Official Decisions.”
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PRACTICE ROUND 2
R & D Round 2
Able – Tweak positioning to reduce age. Example: Decrease Able’s size by 0.1. Note
that Able is leaving the High Tech segment. Next year you will reduce the MTBF to
14000.
New Product – Note that you cannot edit the new product. This is because your
product will not emerge from R&D until its current project completes. Under the rules
of the simulation, new R&D projects cannot begin until the old one completes.
Marketing Round 2
Able – Hold price, promotion and sales budgets at current levels. Do not change sales
forecast. Example: Price $33.00, promotion budget $1000, sales budget $1000, and
sales forecast 1250.
New Product – Marketing decisions for the new High End product are not necessary
because there is no production capacity with which to build the product. This is not an
issue because the product will not emerge from R&D until very late in Round 2. Ignore
price, promotion and sales budget decisions for your new product.
Production Round 2
Schedule production using the formula:
(Unit Sales Forecast X 1.15) – Inventory On Hand
Able – Sell 100,000 units of capacity by entering -100 in the Buy/Sell Capacity Cell.
New Product – Buy 300,000 units of capacity by entering 300 in the Buy/Sell Capacity
cell. Set an automation level of 2.0.
Finance Round 2
Match your plant investment with a long-term bond. If you do not have sufficient new
bond debt capacity, issue stock to cover the shortfall.
For this round, look at the proforma balance sheet and apply the following rule of
thumb. Keep your cash account in between 6% and 10% of your projected sales for
the following round. To do this, look at your proformas income statement to see your
projected Total Sales. Take the listed Total Sales and make sure that your Cash account
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on your proformas balance sheet is 6%-10% of that number (Ex: Proformas Cash/
Proformas Total Sales = Number between .06 & .10).
Adjust your cash position to meet the above guidelines. If you are cash poor, issue
stock. If you are cash rich, pay dividends and buy back stock.
Do not issue current debt.
Save decisions by selecting “Update Official Decisions.”
PRACTICE ROUND 3
R & D Round 3
Able – Reduce reliability (MTBF) to reduce material cost. Example: Reduce Able’s MTBF
to 14000.
Marketing Round 3
Able – Hold promotion and sales budgets steady. Able will now be a Low Tech product,
therefore the sales forecast should adjust for the loss of High Tech sales. Example: Price
$33.00, promotion budget $1000, sales budget $1000, and sales forecast 1100.
New Product – Price at $45. Set promotion and sales budgets at $1200 each. Enter 450
for Your Sales Forecast.
Production Round 3
Schedule production using the formula:
(Unit Sales Forecast X 1.15) – Inventory On Hand
New Product – Purchase 350,000 units of capacity by entering 350 in the Buy/Sell
Capacity box.
Important: As your new product is coming out sometime during the year, you might
not be able to use the above formula – new products cannot begin production prior to
their revision (release) date. Should the number you enter into the production schedule
turn red, reduce the schedule until the red number turns black.
In future rounds, you will begin phasing out your Able product by selling off your
production capacity. You will also launch a new product to the High Tech segment as
Adam transitions into a Low Tech product.
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Finance Round 3
For this round, look at the proforma balance sheet and apply the following rule of thumb. Keep
your cash account in between 6% and 10% of your projected sales for the following round. To do
this, look at your proformas income statement to see your projected Total Sales. Take the listed
Total Sales and make sure that your Cash account on your proformas balance sheet is 6%-10% of
that number (Ex: Proformas Cash/Proformas Total Sales = Number in between .06 & .10).
Do not retire long-term debt. Use excess cash to buy back stock and pay dividends.
Save decisions by selecting “Update Official Decisions.”
SUMMARY CONSIDERATIONS
Your instructor may want you to play another practice round. If so, continue the Product
Lifecycle Cost Leader vision.
Having executed the plan for two or three rounds, you are now in a position to analyze it.
Consider the following questions:
What are this plan’s strengths? Weaknesses?
How will competitors respond to your actions?
How can you influence competitors to avoid competing with you directly?
Which performance measures support this plan?
What is the long range potential of this plan? Its future sales volume? Its future profitability?
How can you best coordinate this plan as a team?
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