MgtSim-3

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If Company well managed you make right
decisions

• Production s
• Plant Utilization150
• Turnover ratio 1 indicates no idle assets
• Inventories 1-90 days
• Marketing
• Customer satisfaction40
• Awareness80
• Accessibility80

• Balance Sheet
• Current ratio 2-2.5
• Leverage 1.5-2.5
• Sales/Current assets 3-5
• Income Statement
• Contribution Margin 30
• ROS5

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BUSINESS PLAN GUIDELINE Page 1 Mission
Vision Statements  SECTION I SITUATION
ANALYSIS 1.1 External Environment -
Opportunities Threats MARKET STRUCTURE
MARKET DEMAND MARKET SEGMENT VALUE MARKET
SEGMENT DYNAMICS    1.2 Internal Environment-
Analysis Evaluation of Company's Strengths
Weaknesses Marketing Management Production
HR Management  Financial Management  1.3
Situational Analysis Results SWOT
Analysis    SECTION II STRATEGY, OBJECTIVES
TACTICS 2.1 Select one of the Six Basic
Strategies delineated in your Online Guide
Describe your Company's Growth Competitive
Strategy be specific regarding any plans for new
product development (What products? Which
segments? What years?) 2.2 Functional Domains-
Objectives Tactics Marketing RD- Production
HR Financial-
DECISION GUIDES
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Generically, profits are driven by the companys
asset base and by its efficiency working those
assets
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Key Demand Consideration
Key Capacity Consideration

• Overall market growing _at_ 14/yr
• Average company should/could double - sales in
  6 years

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How effective will u b in building your Cos
asset base?

• At outset should be spending 10-25M / round on
  plant improvement
• By end should expand asset base to min 140M to
  160M

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Rounds 6,7,8 should be most profitable

• NET PROFITS
• Year 1 6 million
• Year 2 8 million
• Year 3 10 million
• Year 4 12 million
• Year 5 16 million
• Year 6 21 million
• Year 7 27 million
• Year 8 35 million

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Which most often selected but least preferable
to do?
Things you can do w/ your

• Pay off Debt
• Invest in growth
• Buy-back stock
• Pay dividends

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Reducing Leverage

• Says to stockholders We can think of nothing
  better to do w/ than save you interest
  payments
• More debt eliminated the greater target you
  become for a takeover..
• No reason not to maintain Co. Financial Structure
  that got you to position of high profitability

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Most Basic Principle Guiding Your Decisions

• will it Increase Demand for Product

• Decrease Cost
• of Mfgg Product

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Increase Product Demand Driven by Effective
Mgt of 4 Ps

• Product Mgt.
• Introduce new brands, Repositioning / killing old
  brands
• Promotional Mgt.
• Optimizing Segment Media Vehicle budget
  allocations
• Distribution Mgt.
• Optimizing Outside Inside Sales-force segment
  allocations
• Pricing-
• Competitive pricing Fine-tune A/R

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Decrease Mfgg Costs

• Effective Mgt of two other Ps
• People
• Investments in HR,TQM PI
• Plant
• Investments in automation capacity mgt.

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Increase Demand

• Driven by Effective Mgt of 4 Ps

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Product Mgt. Options

• For every product - 3 options
• Improve it-
• Reposition it
• Kill it- sell off capacity- reinvest recovered
  capital

Reposition
Improve
Kill
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ConsequencesImproving a product

• PRO
• Increase sales market share

• Cons
• offering a better- price, design and/or higher
  awareness- accessibility- costs
• High Tech segments can take 2 years-
• Will increase SGA budgets squeeze margins

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Questions need to answer if plan on improving a
product

1. What are your limits -How much can you cut price?
   Increase RD Promotion Sales Budget?
2. Competitor moves- improving existing brands in
   seg. and/or introducing new brands in seg.

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Variation on Improving Can Reposition

• Can allow product to age gracefully and ride the
  life cycle

Can redirect trajectory of brand position into
adjacent segment
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Questions need to answer if plan on repositioning
a product

1. How long will it take?
2. Material labor cost implications?
3. Impact on products in segment entering? Leaving?

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In final analysis You Could decide to Kill
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Questions need to answer if plan on Killing a
product

1. How many products do you plan to have overall?
2. Going to add a replacement in this or another
   segment?
3. Kill immediately-or phase out?
4. Other options- Improve? Reposition?
5. How will competitors react?

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ConsequencesKilling a product

• 1) Makes it difficult maintain Overall Market
  Share
• Even if Niche strategy-should increase share in
  selected niche(s) to offset loss in abandoned
  segments
• Investors-like to see Co. maintain overall
  starting share.

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ConsequencesKilling a product

• If not replaced
• 2) Hands over Market Share to competitors
• 3) Removes strategic opportunity for distribution
  efficiencies.

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Segment Consequences Killing a product

• LOW TECH Segments
• Kill the Cash Cow
• In opening years 2/3s volume profit from Low
  traditional sectors
• HIGH TECH Segments
• Difficult to re-enter, could take up to 3 years
  to launch new prdt.

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Your Your Competitors Product Mgt. Decisions

• Impact Arenas
• of Competition

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Lets assume

• LOW END 0-1 product killed.. 0-1 repositioned
  or introduced
• TRADITIONAL 3-6 repositioned from High0-1
  killed1-2 introduced
• SIZE 0-1 killed, 0-1 repositioned to
  Traditional, 1-2 introduced
• PERFORMANCE 1-2 killed, 0-1 repositioned to
  Traditional, 0-1 introduced
• HIGH 1-3 killed or repositioned to
  Traditional, 1-3 new products arrive in rounds 2
  or 3

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Round 3- Forecast nature, magnitude arena of
Competition

• LOW END 6 productsrivalry unchanged
• TRADITIONAL 9 products, w/ 3 repositioned
  increased competition
• SIZE 7 products, w/ 2 new increased
  competition
• PERFORMANCE 4 products, w/ 1 new reduced
  competition
• HIGH 6 products, w/ 2 new increased competition

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-Given Round 3 Scenario-How should adjust your
production capacities?
Round 0-1st shift Capacity Round 3-Fair/Equal Share
Traditional 1800 1068
Low End 1400 2081
High End 900 668
Performance 600 823
Size 600 469
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Optimal levels of capacity?
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Most Basic Principle Guiding Your Decisions

• will it Increase Demand for Product

• Decrease Cost
• of Mfgg Product

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Optimal levels of automation?
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Once have optimal levels of capacity Need to
have most efficient levels of production costs
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How to have most efficient levels of production
costs

• Reduce Material costs
• Proffer minimal/optimal level MTBF
• TQM/Sustainability Initiatives
• Process Management Initiatives
• Reduce Labor costs
• TQM PI Initiatives
• Increase automation
• Invest in employee recruitment training
• Utilize 2nd shift

• Increases length RD on product line-makes
  re-positioning take longer
• Incur employee separation costs

• w/ maximum expenditures can realize 18
  improvement in productivity in 6 years!

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Why run 2nd shift when labor costs 50 higher?
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Why run 2nd shift when labor costs 50 higher?
Answer by using your proformas 1- On production
spreadsheet build at capacity- if have 1000 units
build 1000 units 2-On Marketing display-
FORECAST 1000 UNITS 3.-ON Proforma Income
statement- note NET MARGIN
THE BIQ Q If we double sales will we
double our net margin? Will we make less because
labor costs are 50 higher for 2nd shift?
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Why run 2nd shift when labor costs 50 higher?
Answer by using your proformas 1- On production
spreadsheet double output-run full 2nd shift
2-On Marketing display- double forecast 3.-ON
Proforma Income statement- NET MARGIN will more
than double
When run 1 shift- must pay all fixed costs- 2nd
shift gets a free ride-only has to pay labor
premium Material costs
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Now that that you are producing-- in the most
efficient manner-- a perfectly designed product

• need to make sure maximum consumers are
  aware of it can easily buy it

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Moving Product

• Message Weight Media Planning
• Breadth, Depth Heft of Distribution Network
• Optimal Pricing Credit Terms

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Advertising Budget Drives Awareness
New products are newsworthy events. The buzz
creates 25 awareness at no cost.
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Sales Budget Drives Access
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Fine tuning your Promo, Sales Pricing
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Promo Budget
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Sales Budget Time Allocations
Decide on how many salespeople Mfr Reps will
have
How much effort will be focused on market
segments

• OUTSIDE sales-meet face-to-face (cost
  120K/each)
• INSIDE sales-works leads operates website
  customer support systems (cost 50K/each)
• Distributors push product (cost 100K/each)

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Pricing / Credit terms

• A/R Lag (in days) is the time between customers
  receiving products when they are expected to
  pay for em
• No credit - demand falls to 65 of normal.
• At 30 days - demand is 92.
• At 60 days - demand is 98.5
• At 120 days - demand is 100.
• The longer the lag, the more your cash is tied up
  in receivables.

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Made all the Right Decisions --product design,
pricing, positioning, promotion, distribution
credit terms production line capacity,
automation, hiring training, TQM PI
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• Your Competitors produce a better product
• /or You produce too much of your great product

IF
Youll be left w/less revenue than anticipated
PLUS production inventory carrying costs that
must be paid..
Then
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Youre left w/less revenue than anticipated and
did not plan allocate enough cash to cover your
production inventory carrying costs....
IF
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Maintain Adequate working capital cash reserves
In order to
Need to

• Avoid Big AL a Liquidity Crisis-

• Have realistic/ accurate sales forecasts

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1. Quick N Dirty
2. Consumer Prefs
3. Best / Worst Case

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Estimate FAIR EARNED Share

• 2 Qs
• What will the average product sell in the segment
  next round?
• To what degree is your product above or below
  average- on consumers' buying criteria?

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EARNED Share - Sales Forecast
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2
3
4

• Determine industry demand next round.

Estimate products that will be in segment.
Divide total industry demand by the number of
products FAIR SHARE Your products EARNED
demand can be between ½ and 2X the average
products demand.
Compare your product with competing products.
Factors include design, awareness,
accessibility, and planned mid-year revisions.
Examine industry capacities, and the capacities
of the best products. Can products meet the
demand they generate?
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2 Forecast by Consumer Prefs
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Forecast off Customer Survey Scores
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For Example-in Traditional segment everyone
begins w/ 13 market share

• Opening rounds crucial- can establish competitive
  advantage (that can be sustained for many years-
  even thru-out entire sim.)
• Initial round demand can vary /- 25
• Later rounds best case/worst case vary
  10-15

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After 1st Year/Round-Can see demand spread
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R1 Dec Survey score of 223 Predicted sales R2 Actual Sales R2
Baker 43 19 1827 units 1758 units
Able 40 18 1731 1598
Fast 36 16 1339 1560
Eat 36 16 1539 1492
Cake 42 19 1827 1339
Daze 26 12 1154 1045
Total223
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R2
R1 Survey score
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40
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36
42
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1
2
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CASE
CASE
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• Worst Case
• BIG INVENTORY/ little cash
• Best case
• Lots of CASH / little Inventory

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• Enter WORSE case- in your sales forecast on
  marketing spreadsheet
• Enter BEST case- in production schedule on
  production spreadsheet
• Spread show up as inventory on proforma BALANCE
  SHEET

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In WORSE CASE You have lots of Inventory
little or no Cash.
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In WORSE CASE You have lots of Inventory thus
need to drive your cash position to the black
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To adjust your cash position --

• If you are cash poor, issue Stock /Bonds - or
  consider a short term loan
• If you are cash rich, pay dividends and/or buy
  back stock.

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Important Considerations re BEST-WORST Scenario
Analyses

• By adjusting your CASH POSITION according to your
  WORST CASE estimate will avoid BiG AL

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Important Considerations re BEST-WORST Scenario
Analyses

• By adjusting production according to BEST CASE
  estimate will minimize loss of profit due to
  Stock-outs
• Fixed costs (marketing, RD, interest or
  depreciation) already covered
• Thus, any additional sales would only incur
  variable (production) costs

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• For example,
• If your annual sales were 120M, in one month
  youd sell 10M.
• If a months material labor costs 7M, you
  missed contributing 3M to Net Margin.
• This would be taxed in the simulation at 35, so
  your opportunity cost is a missed 2M in profit.

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How Big is your Slinky?

• Worst Case
• BIG INVENTORY/ no cash risk seeing Big Al
• Best case
• Lots of CASH / no Inventory -you risk stockout

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Determining A Reasonable Spread

• Want to avoid generating an ultra Conservative
  Worst case scenario matched w/ an ultra
  Optimistic Best case scenario
• Should be able to sell excess inventory in betw.
  6 16 weeks
• Any less -- risk a visit from Big Al
• Any more - would require major screw-up from
  competition

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How to measure your slinky slack--
Take your total inventory costs 23,900M
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Divide by total variable costs of inventory
sold 23,900M/131,119M .18 52weeks .18
9 Risk 9weeks of Inventory to avoid stockout
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• Tutorials Forecasting Developing a Unit
  Sales Forecast
• Guidelines Re Sales Forecasting

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What is the Relationship between My Strategy
Success Measures
One more thing to think about
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Strategy
Success Measures

• Cumulative Profits
• Ending Market Share
• ROS
• Asset Turnover
• ROA
• ROE
• Ending Stock Price
• Market Cap.

Performance Measures- Defined Performance
Measures-Dynamics
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Diff Strategies Play into Different Success
Measures
Profit MS SP MC ROE pf/e ROS pf/s AT s/a ROA pf/a
BCL L2-3 X X X
Cost- Niche PLC X X X
B-Diff L1.5-2 X X X X
Niche-PLCDiff X X X X
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• Select Success Measures Determine Relative
  Weightings
• Need to enter weightings prior to round-1

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This weeks assignment

• 1) Draft- Financial Objectives Tactics
• 2) Draft- Mission Vision Statements