Business War Game Competing in the Marketplace INSTRUCTOR SLIDES, PART 1

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Business War Game Competing in the
MarketplaceINSTRUCTOR SLIDES, PART 1
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Learning Strategy
Business war games are a form of combative
training where participants pit their business
skills against those of formidable opponents
under the watchful eye of a training coach.
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Learning StrategyLearn by Doing

• Participants learn about all aspects of business
  by managing a simulated business.
• The Marketplace scenario follows the life cycle
  of a new product.
• Business decisions are introduced as they become
  relevant in the evolution of the product.

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Key Benefits

• Develop teamwork.
• Promote better decision making by helping
  participants see how their decisions can affect
  the performance of others and the organization as
  a whole.
• Facilitate learning of basic business concepts,
  principles and ways of thinking

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Key Benefits

• Develop strategic planning and execution skills
  within a rapidly changing environment.
• Instill a bottom line focus and the simultaneous
  need to deliver customer value.
• Develop financial management skills.

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Key Benefits

• Discover how important it is to use market data
  and competitive signals to adjust the strategic
  plan and more tightly focus business tactics.
• Build confidence through knowledge and experience.

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How is the business war game conducted?

• Teams are placed in a war game scenario, starting
  up and running a new business venture.
• The opposition is played out by competing teams.

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Objective to profitably capture a dominant
market position
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Business teams

• Each team member assumes a tactical area of
  responsibility.
• marketing
• finance
• research
• production
• overall leadership

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How conducted?

• Business team receives information on current
  situation.
• Current situation is evaluated, strategy
  formulated, and tactics set in place.
• Tactical decisions are fed into the Marketplace
  simulator, along with decisions of opponents.
• Results of decisions are returned to business
  team.

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How conducted?

• The business team can acquire information on what
  is happening in the Marketplace
• customer reaction to market decisions
• competitor actions
• Current situation is evaluated, strategy
  formulated, and tactics set in place.
• Tactical decisions are again fed into the
  Marketplace simulator.

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Game Scenario

• The product line is microcomputers.
• The year is sometime in the early 1980s.
• The market is Europe, United States, Canada,
  Brazil, and Japan.
• The microcomputer industry is in its introductory
  stage of the product life cycle.

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Game Scenario

• Several new venture firms are entering the
  market.
• These new manufacturers will sell through company
  owned sales offices in major metropolitan
  markets.
• 95 of the potential demand is expected to come
  from the business sector.

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Sales Offices
Montreal Toronto Calgary Vancouver
New York Atlanta Chicago Los Angeles
London Paris Berlin Rome
Osaka Tokyo Yokohama Sapporo
Curitiba Rio de Janeiro Sao Paulo Belo Horizonte
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Market Structure
Price
Mercedes
Traveler
Innovator
Performance
Work Horse
Cost Cutter
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Business War Game Competing in the
MarketplaceINSTRUCTOR SLIDES, PART 2
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Chronology of Events

• Q1, organize the team, name the company and
  contract for a survey of potential customers.
• Q2, analyze market information, establish
  strategic direction and set up shop (build plant,
  design brands and set up sales offices).

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Chronology of Events

• Q3, Q4, test market brands, prices, ad copy,
  media campaigns, sales staffing. Study
  competition and make adjustments in strategy.

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Chronology of Events

• Q5, prepare a two-year business plan. Present
  business plan and financial request to venture
  capitalists and negotiate equity investment.
• Q5 - Q8, initiate international roll-out campaign.

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Chronology of Events

• Q9, present report to the Board regarding
• second year performance,
• deviations from plan,
• justification for departures,
• analysis of current market, and
• plan for third year.

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Equity Financing

• The initial capitalization is 4,000,000 which is
  being invested by the executive team in 1,000,000
  increments over the first 4 quarters.
• The executive team owns 100 of the company.
• Four thousand shares of stock will be issued to
  the executive team in exchange for their
  4,000,000.
• The initial stock value is 1000 per share.

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Equity Financing (continued)

• At the end of the first year of business, the
  executive team will have the opportunity to
  request up to 5,000,000 from a venture capitalist
  (instructor).
• The venture capitalist will expect an outline of
  the strategic plan for the second year in
  business, including target markets, geographic
  expansion, RD, plant expansion, etc.

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Debt Financing (Q5 and beyond)
Bank

• The bank will extend a line of credit to the
  executive team equal to one and a half times the
  firms equity position in the previous quarter,
• The bank is highly risk averse and will call in
  your loan in part or whole if your debt capacity
  declines due to unusual or extended losses.

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Debt Financing (continued)

• Other financial institutions will also buy
  long-term notes at 2 points over conventional
  bank loans. The acceptable debt capacity is two
  times the firms equity position in the previous
  quarter.
• Long-term debt is for 5 years with little
  possibility of the financial institution calling
  in the note due to short-term swings in income.

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Special Financing Needs

• The bank is intolerant of poor financial
  management.
• If a firm ends a quarter with a negative cash
  position, the bank will contact a loan shark to
  obtain an emergency loan to cover the firms
  checking account.

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Loan Sharks Financing Terms

• Loan shark requires repayment in the next quarter
  
• The emergency loan interest rate is a sliding
  scale which begins at 10 per quarter and may go
  as high as 25 per quarter.
• For each 1000 which the loan shark places in your
  checking account, he will take one share of stock
  in your firm.
• The issuing of stock to a loan shark causes a
  dilution of your stock value and your share of
  the company.

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Bankruptcy

• A firm is technically bankrupt if its cumulative
  losses exceed its equity investment.
• Bankruptcy occurs when the sum of the retained
  earnings and the common and preferred stock is a
  negative number.
• Stated differently, the management has used up
  all of the equity of the firm when the negative
  value of the retained earnings exceeds the value
  of the common and preferred stock .

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Performance Evaluation

• Report to Board
• Strategic thinking and tactical execution
• Market performance
• market share in targeted markets
• total profit as measured by retained earnings
• cash management (avoidance of loan sharks)
• How well company is prepared for the future

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Business War Game Competing in the
MarketplaceINSTRUCTOR SLIDES, PART 3
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View Sample Decisions
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Market Reactions to More of a Feature
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(No Transcript)
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Hot
Little interest until threshold is crossed
Cold
Less
More
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(No Transcript)
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Q2, Establish Strategic Direction

• Analyze market information,
• Establish strategic direction
• select target segments
• decide on competitive posture
• Set up shop
• develop distribution strategy
• locate and build plant,
• open initial sales offices for test market
• design brands for target market segments

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Learning Points for Quarter 2

• Managing the team
• Market opportunity analysis
• Segmentation and target marketing
• Strategic and tactical planning
• Financial management

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Learning Points for Quarter 2

• Game theory competitive positioning
• Brand design linking product features to
  customer benefits
• Marketing and manufacturing tradeoff satisfy the
  customer or run the most efficient factory, the
  issue of changeover
• Financial liquidity cash versus assets
• Logistics of plant location production versus
  shipping economies

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Marketplace Schedule

• See handout

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Q3, Go to Test MarketThe Goal is to Maximize
Learning, Not Profits.
The following slides are for Quarter 3
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Q3, Go to Test Market

• Set selling prices
• Develop advertising campaign
• design 2 ads, one for each brand
• determine number of placements per ad
• Develop distribution strategy
• hire sales force for quarter
• open new sales offices for Q4

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Q3, Test Market

• Schedule production
• set minimums and maximums for warehouse
• forecast demand
• run factory simulation, check numbers
• Contract for market research on customers and
  competition
• Check all pro forma financial statements

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Learning Points for Quarter 3

• Execution of a coherent strategy
• Management of cash in the face of great
  uncertainty
• Learning to walk before you run

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Learning Points for Quarter 3

• Marketing strategy coordinating a host of
  tactics
• Pricing balancing costs, profit, what the market
  will bear, and competition
• Testing the market discovering the market
  response function
• Production managing capacity, inventories, and
  costs in light of demand goals

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Quarter 4 - The Skillful Adjustment

• The following slides are for the introduction to
  Q4 decisions.

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Q4, Evaluate Performance, Skillfully Adjust
Strategy

• Check customer reaction to brands, prices and
  advertising
• Check financial performance
• Check production operations - quality new
• Check out competition
• strategic direction
• tactics
• markets response

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Q4, Skillfully Adjust Strategy

• As needed, adjust
• strategy
• brand designs and prices
• advertising
• sales management
• production plan
• Check finances
• Feed decisions into Marketplace simulator

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Business War Game Competing in the
MarketplaceINSTRUCTOR SLIDES, PART 4
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View Software
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Deceptive Advertising

• Starting with Quarter 4 all advertising claims
  must be verifiable.
• Claims must be true based upon facts from prior
  quarter.
• A company can be sued if it makes false claims.
• Lawsuits must be filed within 90 minutes of the
  start of the quarter.

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Deceptive Advertising

• To file a lawsuit, you must put in writing
• which ad had a false claim
• which ad had a false claim
• in which city the ad was placed
• why the claim was false
• A copy of the lawsuit must be given to
• the company being sued
• your industrys coach/instructor

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Deceptive Advertising

• The company being sued has 60 minutes to respond
  in writing.
• It must respond in writing stating
• which company has accused them of false
  advertising
• which ad was thought to have had a false claim
• in which city the ad was placed
• why the claim was true

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Deceptive Advertising

• A copy of the lawsuit must be given to
• the company which initiated the lawsuit
• your industrys coach/instructor
• Your coach/instructor will take 30 minutes to
  make a ruling

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Deceptive Advertising Penalties

• First offense
• barred from making the claim for 1 year
• Second offense
• barred from making the claim for 1 year
• fine of 2 of all revenues
• fine is given to competitors
• firm filing lawsuit is given more than the others
• Third offense
• fine of 5 of all revenues

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Measurement of the Firms PerformanceThe
Balanced Scorecard
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Financial performance
Market performance
Manufacturing productivity
Action Potential of the firm
Marketing effectiveness
Asset management
Management of financial resources
Investments in the firms future
Creation of wealth
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Action Potential of the Firm Financial
performance x Market performance
x Marketing effectiveness x Investments
in the firms future x Creation of wealth
x Management of financial resources
x Asset management x Manufacturi
ng productivity
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Learning Points for Quarter 4

• The management of strategy
• learning from your customers
• learning from your competition
• learning from your financial information
• skillfully adjusting your strategy and tactics
• Management of financial resources

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Learning Points for Quarter 4

• Using the tools of management
• market feedback
• accounting reports (financial statements)
• industry financial benchmarks (industry financial
  ratios)
• profitability analysis (activity based costing)
• quality control of factory operations
  (statistical process control)

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Quarter 5Making Plans for the Future

• The following slides are for the introduction to
  Quarter 5.

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Q5, Making Plans for the Future

• What do you do when cash and net income from
  current operations are not sufficient to fund new
  business development activities?
• expand owners equity (bring in new investors)
• leverage your investment (borrow money from
  others)

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Profits to Invest in the Business
costs to setup and grow the business

Money
0
Time
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Profits to Invest in the Business
Revenue
costs to setup and grow the business

Money
0
Time
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Profits to Invest in the Business
Revenue
costs to setup and grow the business

dividends for investors
Profit
Profits
0
Time
venture capital required to cover losses
-
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New Funding Options

• Sell part of the company to venture capitalists
• venture capitalists are willing to invest up to
  5,000,000
• venture capitalists may ask for up to 60 of the
  company in exchange for their investments
• Borrow money
• short-term bank loans
• long-term bank loans

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Business War Game Competing in the
MarketplaceINSTRUCTOR SLIDES, PART 5
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Venture Capitalists Want a Plan
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A strategy is a plan of action
A strategy is a series of interconnected tactics
purposely organized to be executed in a
particular order in time and space for the
purpose of achieving specific goals.
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The best-planned strategies will not survive the
test of battle
General George Patton
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Plans are worthless, but planning is everything
General Dwight D. Eisenhower
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The devil is in the details.
Admiral Rickover
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It is better to have a class A team with a class
B plan than to have a class B team with a class A
plan.
Almost any venture capitalist
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Venture Capitalists Want a Plan

• History of firm
• Market assessment
• Performance to date
• Marketing strategy
• Manufacturing strategy
• Financial strategy
• Pro forma financial statements
• What is in it for them?

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Market Assessment

• Nature of business opportunity
• Market potential
• Competition

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Firms Performance After One Year

• Market position
• segments
• geography
• competition
• Market performance
• demand and market share
• customer satisfaction (brands, prices,
  reliability)
• Financial performance
• cash
• profitability

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Marketing Strategy

• Target markets
• Geographic market expansion
• timing and order of new markets
• expansion in advertising and sales efforts
• New brands
• RD investments in new features
• introduction of new brands

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Manufacturing Strategy

• Plant expansions
• when
• how much
• Productivity improvements
• changeover
• quality
• inventory

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Financial Strategy

• Cash flow requirements
• Sources of capital
• venture capital
• debt
• short-term
• long-term
• Profitability and asset projections
• Return on investment

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Oops Factor in Strategic Planning
Develop tactical plan
Check cash flow
Oops!

Check cash flow
Revise tactical plan

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Sources and Uses of Capital

• Venture capitalists want to know how their money
  will be spent.
• Venture capital can only be spent on RD, new
  sales offices, factory improvements.
• Venture capital can not be spent on advertising,
  or sales people.
• Use long-term debt for factory expansions.
• Use short-term debt for market uncertainty and
  inventory fluctuations.

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Venture Capital Fair
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Learning Points for Quarter 5

• Strategic and tactical planning
• time phasing decisions into the future
• working investment money and debt to support
  tactical plans
• Understanding cash flows
• cash is king
• how is profit different from cash?

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Competitive Thinking

• Coopetion strategic alliances with competitors
• multiplying resources
• developing markets more quickly
• Game theory and prisoners dilemma
• (if I do this and they do that, then .?)
• Negotiations

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Learning Points for Quarter 5

• Management of strategy
• discover the causes of performance shortfalls
• adapt to new opportunities and problems
• work on the margin to improve performance
• where should money be spent next?
• how can we get more out of our current
  investments?
• manage the future (taking the initiative now by
  expending resources that will shape the events
  and opportunities of the future)

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Learning Points for Quarter 5

• Marketing
• discover and exploit the markets many response
  functions
• learn from smart competitor decisions
• integrate marketing with the rest of the
  organization
• You can not go to Hawaii on market share
• (at the end of the day, wealth creation is the
  goal)

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Business War Game Competing in the
MarketplaceINSTRUCTOR SLIDES, PART 6
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Wrap Up of Exercise
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When we work strictly in our functional silos, we
are like a bunch of blind people trying to
understand what an elephant is.
Please tell me what it is..
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With business war games, you can crawl all over
and under the enterprise to help you to see and
understand the whole thing
Accounting
Marketing
Sales
It is an enterprise!
Finance
Production
Engineering
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Key Benefits

• Develop teamwork.
• Promote better decision making by helping
  participants see how their decisions can affect
  the performance of others and the organization as
  a whole.
• Facilitate learning of basic business concepts,
  principles and ways of thinking

90
Key Benefits

• Develop strategic planning and execution skills
  within a rapidly changing environment.
• Instill a bottom line focus and the simultaneous
  need to deliver customer value.
• Develop financial management skills.

91
Key Benefits

• Discover how important it is to use market data
  and competitive signals to adjust the strategic
  plan and more tightly focus business tactics.
• Build confidence through knowledge and experience.