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Describe two workplace skills you would like to learn during the CAPSIM Business Simulation project in detail and discuss how they operate in the workplace.  Describe the value each skill could add to an organization.  Your finished document should follow APA formatting guidelines and be between 400 and 600 words. For questions on APA style CAPSTONE BROAD DIFFERENTIATION This practice exercise will help you understand the relationships between business strategy, tactics, functional alignment, and the Capstone simulation. We will use the Digby team 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 Digby team will adopt a Broad Differentiation strategy, maintaining a presence in every segment. We will gain a competitive advantage by distinguishing our products with an excellent design, high awareness, and easy accessibility. We will develop an R&D competency that keeps our designs fresh and exciting. Our products will keep pace with the market, offering improved size and performance. We will price above average. We will expand capacity as we generate higher demand. Vision Statement Premium products for the industry: Digby brands withstand the tests of time. Our primary stakeholders are customers, stockholders, management, and employees. Research And Development (R & D) We will keep our existing product line, maintaining a presence in every segment. Our goal is to offer customers products that match their ideal criteria for positioning, age, and reliability. Marketing We will spend aggressively in promotion and sales in all segments. We want every customer to know about our superb designs, and we want to make our products easy for customers to find. We will price at a premium. Production We will grow capacity to meet the demand that we generate, avoiding a second shift when possible. After our products are well positioned, we will investigate moderate increases in automation levels to improve margins, but never at the expense of our ability to reposition products and keep up with segments as they move across the perceptual map. Finance We will finance our investments primarily through stock issues and retained earnings, supplementing with bond offerings on an as needed basis. When our cash position allows, we will establish a dividend policy and begin to retire stock. We are somewhat adverse to debt, and prefer to avoid interest payments. We expect to keep assets/equity (Leverage) between 1.5 and 2.0. 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 Broad Differentiator. R & D Round 1 Daze – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Daze’s performance by 0.8 and reduce size by 1.0. Dell – Leave positioning alone, allowing the product to age further. Hold reliability (MTBF) steady. Example: No change required. Dixie – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dixie’s performance by 1.2 and reduce Size by 1.0. Dot – Improve positioning and reduce age. Improve reliability (MTBF) to enhance demand. Example: Increase Dot’s performance by 1.0, reduce size by 0.5 and increase MTBF by 1000 hours. Dune – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dune’s performance by 0.5 and reduce size by 1.2. 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. Important: Make certain that the projects complete during this year before December 31st. Under the rules, a new project can only begin on January 1st. If these projects do not complete before the end of this year, you cannot begin follow-up projects next year. Marketing Round 1 Daze – Increase price, promotion budget, and sales budget. Forecast unit sales near last year’s level because our product will not be revised until late this year. Example: Price $29.00, promotion budget $2000, sales budget $2000, and sales forecast 1100. Dell – Increase price, promotion budget, and sales budget. Forecast decreased unit sales due to the price increase. Example: Price $24.00, promotion budget $2000, sales budget $2000, and sales forecast 1400. Dixie – Increase price, promotion budget and sales budget. Forecast unit sales near last year’s level. Example: Price $39.50, promotion budget $1800, sales budget $1800, sales forecast 400. Dot – Increase price, promotion budget and sales budget. Forecast unit sales near last year’s lfoievel. Example: Price $34.50, promotion budget $1700, sales budget $1700, sales forecast 450. Dune – Increase price, promotion budget and sales budget. Forecast unit sales near last year’s level. Example: Price $34.50, promotion budget $1800, sales budget $1800, sales forecast 380. 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. Make no improvements to capacity or automation at this time. 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 Capstone 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. Pay a dividend between $0.50 and $1.00. Do not issue current debt. If you are short of cash issue stock. Save decisions by selecting “Update Official Decisions.” PRACTICE ROUND 2 R & D Round 2 Daze – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Daze’s performance by 0.9 and reduce size by 0.9. Dell – Leave positioning alone, allowing the product to age further. Hold reliability (MTBF) steady. Example: No change required. Dixie – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dixie’s performance by 1.2 and reduce size by 1.2. Dot – Improve positioning and reduce age. Improve reliability (MTBF) to enhance demand. Example: Increase Dot’s performance by 1.4, reduce size by 0.5, and increase MTBF by 1000 hours. Dune – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dune’s performance by 0.4 and reduce size by 1.4. Marketing Round 2 Daze – Hold price high, increase promotion and sales budget. Forecast sales as an improvement from last year. Example: Price $29.00, promotion budget $2200, sales budget $2200, and sales forecast 1500. Dell – Decrease price, increase promotion and sales budget. Forecast moderate unit sales growth. Example: Price $23.50, promotion budget $2200, sales budget $2200, and sales forecast 1700. Dixie – Decrease price, increase promotion and sales budget. Forecast unit sales near last year’s level. Example: Price $39.00, promotion budget $2000, sales budget $2000, sales forecast 420. Dot – Decrease price, increase promotion and sales budget. Forecast improved unit sales. Example: Price $34.00, promotion budget $1800, sales budget $1800, sales forecast 500. Dune – Decrease price, increase promotion and sales budget. Forecast improved unit sales. Example: Price $34.00, promotion budget $1800, sales budget $1800, sales forecast 450. Production Round 2 For each product, schedule production using the formula: (Unit Sales Forecast X 1.15) - Inventory On Hand Make no improvements to capacity or automation at this time. Finance Round 2 Look at the proforma balance sheet, and add together your cash and inventory accounts. Apply the following rule of thumb. Keep between 15\% and 20\% of your balance sheet assets in cash plus inventory. You do not care about the mix, but you do want to have adequate reserves to cover unexpected swings in inventory. Adjust your cash position to meet the guideline from Round 1. If you are cash poor, issue additional stock or additional bonds. If you are cash rich, pay dividends. Do not issue current debt. Save decisions by selecting “Update Official Decisions.” PRACTICE ROUND 3 R & D Round 3 Daze – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Daze’s performance by 0.9 and reduce size by 0.9. Dell – Reposition Dell to the current leading edge of the Low End segment. This will take 1.5 to 2.0 years, and it will sacrifice both positioning and age. It is necessary, however, to keep Dell within the Low End segment in the long run. Example: Increase Dell’s performance by 2.5 units and reduce size by 2.5 units. Dixie – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dixie’s performance by 1.1 and reduce size by 1.1. Dot – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dot’s performance by 1.4 and reduce size by 0.5. Dune – Improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Increase Dune’s performance by 0.4 and reduce size by 1.4. Marketing Round 3 Daze – Decrease price slightly, maintain promotion and sales budget. Forecast reduced sales as Daze will not emerge from R&D until late in the year. Example: Price $28.50, promotion budget $2200, sales budget $2200, and sales forecast 1700. Dell – Decrease price slightly, maintain promotion and sales budget. Forecast moderate unit sales growth. Example: Price $23.00, promotion budget $2200, sales budget $2200, and sales forecast 1800. Dixie – Decrease price slightly, maintain promotion and sales budget. Forecast unit sales near last year’s level. Example: Price $38.50, promotion budget $2000, sales budget $2000, sales forecast 420. Dot – Decrease price slightly, maintain promotion and sales budget. Forecast improved unit sales. Example: Price $33.50, promotion budget $1800, sales budget $1800, sales forecast 650. Dune – Decrease price slightly, maintain promotion and sales budget. Forecast improved unit sales. Example: Price $33.50, promotion budget $1800, sales budget $1800, sales forecast 600. Production Round 3 For each product, schedule production using the formula: (Unit Sales Forecast X 1.15) - Inventory On Hand Daze – No change required. Dell – No change required. Dixie – No change required. Dot – Buy 150,000 units of capacity by entering 150 in the Buy Sell Capacity cell. Dune – Buy 150,000 units of capacity by entering 150 in the Buy Sell Capacity cell. Important: There is a one year lag between purchase and use of new capacity and automation for both new and existing products. Finance Round 3 You may have cash on hand to cover your plant and equipment investment. If not, issue stock to cover the shortfall. Look at the proforma balance sheet, and add together your cash and inventory accounts. Apply the following rule of thumb. Keep between 15\% and 20\% of your balance sheet assets in cash plus inventory. You do not care about the mix, but you do want to have adequate reserves to cover unexpected swings in inventory. Adjust your cash position to meet the guideline from Round 1. 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.” SUMMARY CONSIDERATIONS Your instructor may want you to play another practice round. If so, continue the Broad Differentiation 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? USA & Canada 877.477.8787 Outside USA & Canada +1.312.477.7200 W W W . C A P S I M . C O M Unforgettable Business Learning 1 introduction .............................................................. 1 1.1 The Industry Conditions Report ..................................1 1.2 Management Tools .......................................................1 1.3 Company Departments ............................................... 2 1.4 Inter-Department Coordination ................................. 3 1.5 Practice and Competition Rounds .............................. 3 1.6 Company Success ......................................................... 3 2 industry conditions .......................................... 3 2.1 Buying Criteria .............................................................. 3 2.2 Buying Criteria by Segment ........................................ 5 3 the customer survey score ............................. 5 3.1 Buying Criteria and the Customer Survey Score ............. 6 3.2 Estimating the Customer Survey Score ...................... 8 3.3 Stock Outs and Seller’s Market ................................... 9 4 managing your company ................................. 9 4.1 Research & Development (R&D) ................................10 4.2 Marketing .................................................................... 11 4.3 Production ...................................................................13 4.4 Finance .........................................................................15 5 the capstone courier ...................................... 17 5.1 Front Page ................................................................... 17 5.2 Stock & Bond Summaries .......................................... 17 5.3 Financial Summary ..................................................... 17 5.4 Production Analysis ....................................................17 5.5 Segment Analysis Reports .........................................18 5.6 Market Share Report ..................................................19 5.7 Perceptual Map .......................................................... 19 5.8 Other Reports .............................................................. 19 6 proformas and annual reports...................... 19 6.1 Balance Sheet .............................................................. 19 6.2 Cash Flow Statement ................................................. 20 6.3 Income Statement ...................................................... 20 7 additional modules ......................................... 20 7.1 TQM/Sustainability ..................................................... 20 7.2 HR (Human Resources) .............................................. 20 8 plug-ins ............................................................. 21 8.1 Making Decisions ....................................................... 21 9 situation analysis ............................................ 21 10 forecasting ...................................................... 22 10.1 Basic Forecasting Method ........................................ 22 10.2 Qualitative Assessment ............................................. 22 10.3 Forecasts, Proformas and the December 31 Cash Position ............................................................... 23 10.4 Worst Case/Best Case ............................................... 23 11 balanced scorecard ....................................... 23 12 six basic strategies ...................................... 24 12.1 Broad Cost Leader ..................................................... 24 12.2 Broad Differentiator ................................................... 24 12.3 Niche Cost Leader (Low Technology) ....................... 24 12.4 Niche Differentiator (High Technology) ................... 24 12.5 Cost Leader with Product Lifecycle Focus ............... 24 12.6 Differentiator with Product Lifecycle Focus ............ 24 Most instructors include team Practice rounds. When the Practice is over, the simulation will restart from the beginning, using the unique model selected by your instructor. When the Competition begins, your decisions count! Additional tasks could include: » Optional Homework Assignments » Peer Evaluations See your Dashboard for complete information. Login with your User ID and Password at capsim.com. Click on Capstone. Go to Getting Started and follow the steps that include: » Reviewing the Rehearsal Tutorial » Opening the Capstone Spreadsheet » Forming your company The Course Road Map Getting Started Practice Rounds (if applicable) Competition Rounds (if applicable) Your instructor might include a Comp-XM exam. Go to the Course Page and choose Comp-XM. Follow the instructions on the Dashboard which include: » Decision making using the Comp-XM Spreadsheet » Board Queries (quizzes) Go to capsim.com/register, follow the onscreen instructions and register into your Industry.* Create your User ID and Password. *Your instructor may have given you an Industry ID Number. If not, you can locate your industry by using your school name/campus and either the course section number, start date or your instructor’s initials. Registration Table of Contents SUPPORT TICKETS: If you need assistance, please submit a support ticket. Login at capsim.com, click Capstone, then in the left menu, select Help > Support. If you have problems registering, send an email to [email protected] Team Member Guide Management Tools 1 1 Introduction Congratulations, you are now in charge of a multimillion dollar company. You manufacture sensors, which you market to other manufacturers. They put your products into the devices they sell. Your company was created when the government split a monopoly into identical competitors. As a monopoly, operating inefficiencies and poor product offerings were not addressed because: • Increasing costs could be passed onto customers; and • Mediocre products would sell because customers had no other choices. Although last year’s financial results were decent, your products are getting old, your marketing efforts are falling short, your production lines need revamping and your financial management is almost nonexistent. Competition in the post-monopoly era means you can no longer ignore these issues. If you do, competitors with better products and/ or lower prices will take your market share. Sensors Are Everywhere... Sensors are devices that observe physical conditions. For example, the average cell phone contains dozens of sensors that allow it to interpret touch, spatial orientation and signal strength. New sensor businesses are created every day in areas as diverse as security, aeronautics and biomedical engineering. You are in a business-to-business market, not a direct-to- consumer market; the sensors your company manufactures are incorporated into the products your customers sell. 1.1 The Industry Conditions Report Each simulation industry is unique. As your simulation starts, the Industry Conditions Report, which is explained in Chapter 2, will outline the beginning business environment, including customer buying criteria. The Industry Conditions Report is available from your simulation Dashboard. 1.2 Management Tools Here are the tools you need to run your company. 1.2.1 The Rehearsal Tutorial Think of the Rehearsal Tutorial as a driving school for the simulation. The tutorial will show you ways to steer the company, including how to: • Invent and revise products; • Make marketing decisions; • Schedule production and buy/sell equipment; and • Ensure your company has the financial resources it needs for the upcoming year. The sample resources used for the Rehearsal, including its Capstone Courier (see below) and Industry Conditions Report, mirror those used in the actual simulation. The Rehearsal is available from your simulation Dashboard. 1.2.2 The Capstone Courier Every round, you and your competitors will have access to an industry newsletter called the Capstone Courier. The Courier (described in Chapter 5) is an extensive year-end report of the sensor industry. It includes customer buying patterns, product positioning, public financial records and other information that will help you get ahead. In business, knowledge is power. If you want to evaluate your company’s performance or analyze your competitors, the Courier is the place to start. Customer Survey Scores for each product (Chapter 3) can be found in the Courier’s Segment Analysis pages. These scores determine sales distribution. In general, the higher the score, the better the sales. The Courier Reports “Last Year’s Results” The Courier available at the start of Round 1 displays results for Round 0, when all companies were equal just after the monopoly’s breakup. The Courier available at the start of Round 2 will display the results for Round 1. As the simulation progresses and strategies are implemented, results among the competing companies will begin to vary. Company Departments 2 1.3 Company Departments The Rehearsal Tutorial and Chapter 4 discuss company activities. You have four main departments or functional areas: • Research & Development, or R&D • Marketing • Production • Finance Many simulations utilize modules such as Human Resources and TQM (Total Quality Management)/Sustainability. Modules require additional management decisions. Your simulation Dashboard will tell you if any modules are included. Companies use the Capstone Spreadsheet to enter departmental decisions. 1.3.1 Research & Development (R&D) Your R&D Department designs your product line. The department needs to invent and revise products that appeal to your customers’ changing needs. 1.3.2 Marketing Your Marketing Department prices and promotes your products. It interacts with your customers via its sales force and distribution system. Marketing is also responsible for sales forecasts. 1.3.3 Production Your Production Department determines how many units will be manufactured during the year. It is also responsible for buying and selling production lines. 1.3.4 Finance Your Finance Department makes sure your company has the financial resources it needs to run through the year. The department can raise money via one-year bank notes, 10-year bonds or stock issues. The department can also issue stock dividends, buy back stock or retire bonds before their due dates. 1.3.5 Plug-ins Plug-ins are different than modules. Plug-ins and their decisions have a greater overall impact on your organization. For example, the simulation might include the Ethics plug-in, which presents you with an unexpected dilemma. Group discussion and consensus is imperative because your decisions will affect your financial results. Your simulation Dashboard will notify you if a plug-in has been scheduled. The Courier is available from two locations: • From the Capstone Spreadsheet, click Reports in the menu bar; and • On the website, log into your simulation and click the Reports link. 1.2.3 The Situation Analysis Completing the Situation Analysis (described in Chapter 9) will enable you to understand current market conditions and how the industry will evolve in the next few years. It will assist you with your operational planning. The Situation Analysis comes in two versions: • Online interactive • Downloadable PDF (pen and paper) The Situation Analysis is available from your simulation Dashboard. 1.2.4 Proformas & Annual Reports Proformas and annual reports are specific to your company. Proformas are projections for the upcoming year. Annual reports are the results from the previous year. The proformas will help you envision the impacts of your pending decisions and sales forecasts. The annual reports will help you analyze last year’s results. Proformas are only available from the Capstone Spreadsheet’s Proformas menu. To access the annual reports: • From the Capstone Spreadsheet, click Reports in the menu bar; or • On the website, log into your simulation then click the Reports link. 1.2.5 The Capstone Spreadsheet The Capstone Spreadsheet is the nerve center of your company where you formulate and finalize management decisions for every department. After you log into your simulation, the spreadsheet is available from the Decisions link. 1.2.6 Just in Time Information In the spreadsheet decision areas, look for the flag symbol shown to the right. Clicking it will give you detailed information about the area you are viewing. Team Member Guide Buying Criteria 3 to success! Companies compete for up to eight rounds, with each round simulating one year in the life of your company. 1.5.1 Decision Audits The Decision Audit is a complete trail of all team decisions. It will help you identify your decision-making strengths and weaknesses. The audit is available from two locations: • From the Capstone Spreadsheet, click Help in the menu bar; or • On the website, log into your simulation then click the Decision Audit link. 1.6 Company Success The board of directors, shareholders and other stakeholders expect you to make the company a market leader. Successful managers will: • Analyze the market and its competing products; • Create and execute a strategy; and • Coordinate company activities. Best of luck in running a profitable and sustainable company! 2 Industry Conditions The information in your Industry Conditions Report will help you understand your customers. Your customers fall into different groups, which are represented by market segments. Customers within a market segment have similar needs. The segments are named for the customer’s primary requirements such as: • Traditional • Low End • High End • Performance • Size The Industry Conditions Report lists market segment sales percentages and projected growth rates unique to your simulation. The Industry Conditions Report is published once at the beginning of the simulation. It is available from your simulation Dashboard. 2.1 Buying Criteria Customers within each market segment employ different standards as they evaluate products. They consider four buying criteria: Price, Age, MTBF (Mean Time Before Failure) and Positioning. 1.4 Inter-Department Coordination 1.4.1 R&D and Marketing R&D works with Marketing to make sure products meet customer expectations. 1.4.2 R&D and Production R&D works with Production to ensure assembly lines are purchased for new products. If Production discontinues a product, it should notify R&D. 1.4.3 Marketing and Production Marketing works with Production to make sure manufacturing quantities are in line with forecasts. Marketing’s market growth projections also help Production determine appropriate levels of capacity. If Marketing decides to discontinue a product, it tells Production to sell the product’s production line. 1.4.4 Marketing and Finance Marketing works with Finance to project revenues for each product and to set the Accounts Receivable policy, which is the amount of time customers can take to pay for their purchases. 1.4.5 Finance and Production Production tells Finance if it needs money for additional equipment. If Finance cannot raise enough money, it can tell Production to scale back its requests or perhaps sell idle capacity. 1.4.6 Finance and All Departments The Finance Department acts as a watchdog over company expenditures. Finance should review Marketing and Production decisions. Finance should cross-check Marketing’s forecasts and pricing. Are forecasts too high or too low? Will customers be willing to pay the prices Marketing has set? Is Production manufacturing too many or too few units? Does Production need additional capacity? Has Production considered lowering labor costs by purchasing automation? 1.5 Practice and Competition Rounds Practice Rounds allow you to organize workflow among the members of your company. You will begin to compete against the other companies in your simulation or, if you are in a Footrace competition, against a common set of computer-run companies. Don’t confuse the Rehearsal Tutorial with the Practice Rounds! During the Rehearsal Tutorial, you are shown how to make decisions in a scripted environment. During the Practice Rounds, you can experiment with your decisions in a competitive environment. After the conclusion of the Practice Rounds the simulation is reset and the real competition begins. Now it’s time to drive your company Buying Criteria 4 2.1.5 Market Segment Positions on the Perceptual Map Market segments have different positioning preferences. The Low End segment is satisfied with inexpensive products that are large in size and slow performing. It wants products that fall inside the upper-left set of dashed and solid circles in Figure 2.2. The High End segment wants products that are faster performing and smaller in size. It wants products that fall within the lower-right set of dashed and solid circles. Over time, your customers expect products that are smaller and faster. This causes the segments to move or drift a little each month. As the years progress the locations of the circles significantly change. The example in Figure 2.3 shows the location of the market segments at the end of the fourth year. Figure 2.4 shows the segments at the end of the eighth year. 2.1.1 Price Each segment has different price expectations. One segment might want inexpensive products while another, seeking advanced technology, might be willing to pay higher prices. 2.1.2 Age Each segment has different age expectations, that is, the length of time since the product was invented or revised. One segment might want brand-new technology while another might prefer proven technology that has been in the market for a few years. 2.1.3 MTBF (Mean Time Before Failure) or Reliability MTBF (Mean Time Before Failure) is a rating of reliability measured in hours. Segments have different MTBF criteria. Some might prefer higher MTBF ratings while others are satisfied with lower ratings. 2.1.4 Positioning Sensors vary in their dimensions (size) and the speed/sensitivity with which they respond to changes in physical conditions (performance). Combining size and performance creates a product attribute called positioning. The Perceptual Map Positioning is such an important concept that marketers developed a tool to track the position of their products and those of their competitors. This tool is called a Perceptual Map. Note the Perceptual Map in Figure 2.1. You will see this map quite often through the course of the simulation. The map measures size on the vertical axis and performance on the horizontal axis. Each axis extends from 0 to 20 units. The arrow in Figure 2.1 points to a product called Able with a performance measurement of 8.0 and a size of 12.0. Figure 2.1 The Perceptual Map Used in the Simulation: The Perceptual Map plots product size and performance characteristics. Figure 2.2 Beginning Segment Positions: At the beginning of the simulation, segment positions are clustered in the upper-left portion of the perceptual map. Figure 2.3 Segment Positions at the End of Year 4: The overlap between the seg- ments decreases because the Low End and Traditional segments move at slower speeds. Figure 2.4 Segment Positions at the End of Year 8: The segments have moved to the lower right; very little overlap remains. Example! See your Industry Conditions Report for exact segment locations. A product with a performance of 8 and a size of 12 is positioned here Team Member Guide Buying Criteria by Segment 5 In the simulation, there are zero customers interested in products positioned outside of the dashed circles. Your R&D and Marketing Departments have to make sure your products keep up with changing customer preferences. To do this, R&D must reposition products, keeping them within the moving segment circles. See “4.1 Research & Development (R&D)” for more information. 2.2 Buying Criteria by Segment Buyers in each segment place a different emphasis upon the four buying criteria. For example, some customers are more interested in price, while others are more interested in positioning. Positioning and price criteria change every year. Age and MTBF criteria always remain the same. Buying Criteria for the previous year are reported in the Capstone Courier’s Segment Analysis pages. As you take over the company to make decisions for Round 1, your reports reflect customer expectations as of December 31, Round 0 (yesterday). The Industry Conditions Report displays the Round 0 buying criteria for each market segment. Here are two example segments. Example 1: Customers seek proven products at a modest price. • Age, 2 years– importance: 47\% • Price, $20.00-$30.00– importance: 23\% • Ideal Position, size 16.0/performance 4.0– importance: 21\% • MTBF, 14,000-19,000– importance: 9\% Example 2: Customers seek cutting-edge technology in size/ performance and new designs. • Ideal Position, size 11.1/performance 8.9– importance: 43\% • Age, 0 years– importance: 29\% • MTBF, 20,000-25,000– importance: 19\% • Price, $30.00-$40.00– importance: 9\% 3 The Customer Survey Score In any month, a product’s demand is driven by its monthly customer survey score. Assuming it does not run out of inventory, a product with a higher score will outsell a product with a lower score. Each year, some market segments demand greater improvement than others. Therefore segments drift at different rates. Segments demanding greater improvement will move faster and farther than others. As time goes by, the overlap between the segments diminishes. Drift rates are published in the Industry Conditions Report. Market segments will not move faster to catch up with products that are better than customer expectations. Customers will refuse to buy a product positioned outside the circles. Customers are only interested in products that satisfy their needs. This includes being within the circles on the Perceptual Map! Perceptual Maps Can Be Used for Many Types of Products... Perceptual Maps can be used to plot any two product characteristics. For example, cereal manufacturers could plot nutrition and taste. The dots in the figure below represent sales of breakfast cereals based on ratings of taste and nutrition. There are few sales in the lower-left corner– not many consumers want products that have poor taste and poor nutrition. As they review product sales, marketers would notice three distinct clusters. The cluster to the upper left indicates a group of customers that is more interested in nutrition than taste. The cluster to the lower right indicates a group that is more interested in taste than nutrition. The cluster to the upper right indicates a group that wants both good taste and good nutrition. The clusters, or market segments, could then be named “Taste,” “Nutrition” and “Taste/Nutrition.” The simulation uses a similar positioning method to name its market segments. Watch a video overview at: http://capsim.com/go/v/ccss Buying Criteria and the Customer Survey Score 6 3.1.1 Positioning Score Marketers must understand both what customers want and their boundaries. In terms of a product’s size and performance (as discussed in “Section 2.1.5”), the Perceptual Map illustrates these ideas with circles. Each segment is described with a dashed outer circle, a solid inner circle and a dot we call the ideal spot (Figure 3.1). Rough Cut Circle The dashed outer circle defines the outer limit of the segment. Customers are saying, “I will NOT purchase a product outside this boundary.” We call the dashed circle the rough cut boundary because any product outside of it “fails the rough cut” and is dropped from consideration. Rough cut circles have a diameter of 4.0 units. Fine Cut Circle The solid inner circle defines the heart of the segment. Customers prefer products within this circle. We call the inner circle the fine cut because products within it “make the fine cut.” Fine cut circles have a diameter of 2.5 units. Ideal Spot The ideal spot is that point in the heart of the segment where, all other things being equal, demand is highest. Segment Movement Each segment moves across the Perceptual Map a little each month. In a perfect world your product would be positioned in front of the Customer survey scores are calculated 12 times a year. The December customer survey scores are reported in the Capstone Courier’s Segment Analysis pages. A customer survey score reflects how well a product meets its segment’s buying criteria. Company promotion, sales and accounts receivable policies also affect the survey score. Scores are calculated once each month because a product’s age and positioning change a little each month. If during the year a product is revised by Research and Development, the product’s age, positioning and MTBF characteristics can change quite a bit. As a result, it is possible for a product with a very good December customer survey score to have had a much poorer score–and therefore poorer sales– in the months prior to an R&D revision. Prices, set by Marketing at the beginning of the year, will not change during the year. 3.1 Buying Criteria and the Customer Survey Score The customer survey starts by evaluating each product against the buying criteria. Next, these assessments are weighted by the criteria’s level of importance. For example, some segments assign a higher importance to positioning than others. A well-positioned product in a segment where positioning is important will have a greater overall impact on its survey score than a well-positioned product in a segment where positioning is not important. The Industry Conditions Report and the Courier’s Market Segment Analysis pages break down each segment’s criteria in order of importance. A perfect customer survey score of 100 requires that the product: Be positioned at the ideal spot (the segment drifts each month, so this can occur only one month per year); be priced at the bottom of the expected range; have the ideal age for that segment (unless they are revised, products grow older each month, so this can occur only one month per year); and have an MTBF specification at the top of the expected range. Your customers want perfection, but it is impractical to have “perfect” products. In many cases you will have to settle for “great” products, but the better the products, the higher the costs. Your task is to give customers great products while still making a profit. Your competitors face the same dilemma. Figure 3.1 Positioning Scores: The dashed outer circle defines the edge of the rough cut. It measures 4.0 units from the center of the circle. The inner circle defines the edge of the fine cut. It measures 2.5 units from the center. Segment ideal spots are represented by the black dots. The example on the left displays a positioning score for a segment that prefers products with slower performance and larger size. The example on the right displays a score for a segment that demands cutting-edge products with high performance and small size. The orange areas represent the segment rough cuts, where scores rapidly decrease towards zero. Example! See your Industry Conditions Report for exact information. Team Member Guide Buying Criteria and the Customer Survey Score 7 ideal spot in January, on top of the ideal spot in June and trail the ideal spot in December. In December it would complete an R&D project to jump in front of the ideal spot for next year. Positioning Rough Cut Products placed in the rough cut area (orange rings, Figure 3.1) are between 2.5 and 4.0 units from the center of the circle. Products here are poorly positioned and they will have reduced customer survey scores. The farther they are from the fine cut circle, the more the scores are reduced. Just beyond the fine cut, scores drop 1\%. Halfway across the rough cut, scores drop 50\%. Scores drop 99\% for products that are almost to the edge of the rough cut. Sensors that are about to enter the rough cut can be revised by Research & Development (see “4.1.1 Changing Performance, Size and MTBF”). The location of each segment’s rough cut and fine cut circles as of December 31 of the previous year appears on page 11 of the Courier. Positioning Fine Cut Products inside the fine cut (green areas, Figure 3.1) are within 2.5 units of the center of the circle. Ideal spots for each segment are illustrated by the black dots. The example on the left illustrates a segment that prefers proven, inexpensive technology. The ideal spot is to the upper left of the segment center, where material costs are lower. The example on the right …