Differentiation Strategy with a Product Life Cycle Focus
This practice exercise
supplements the principles outlined in the General Strategy lecture (Web site
Tutorials section). It will help you understand the relationships between
business strategy, tactics, functional alignment, and the Capstone simulation.
We will use the
During the practice
rounds, each team is assigned a different business plan. 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 may run
for up to four rounds (at your professor’s discretion). 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. Your team will
then create and implement your own strategic plan for the actual competition.
The practice rounds offer six distinct strategies, but like the real world
there are infinite variations.
· The Capstone™ Team Member Guide
· Lessons 1 and 2 on the Web site
· Documents created during the Situation Analysis, Chapter Four of the Team Member Guide (Perceptual Map, Demand/Capacity analysis, etc.)
· Capstone Courier (the 11 page industry newsletter)
· Company Annual Report (Cash Flow, P & L, Income Statement, Market Share)
The
Premium products for
mainstream customers: The company brands withstand the tests of time. Our
primary stakeholders are customers, stockholders, management, and employees.
We will allow our
present product to become a Low Tech
product as the segments drift – eventually phasing it out as it becomes totally
obsolete. We will introduce a new product to the High Tech segment every other year, and will ultimately have a High Tech product, a transitional
product, and a Low Tech Product.
The team will spend
aggressively in promotion and sales. 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.
We will grow capacity to
meet the demand that we generate, avoiding overtime when possible. After our
products are well positioned, we will investigate modest 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.
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. We measure performance in terms
of stock price, ROS, Asset Turnover, and ROA.
Follow the decision guidelines below unless directed otherwise by your professor. After the practice rounds, you are free to pursue any strategy you wish, and can abandon the Product Life-cycle Differentiation strategy entirely.
Change Baker’s MTBF to 20000.
Launch a new High Tech product – NAME: Bold, NEW PERF: 8.4 NEW SIZE: 12.0 MTBF: 23000
Change Baker’s price to $35, increase Baker’s Promo and Sales budgerts to $2000 (2 million) each. Enter 1300 (1.3 million) in Your Sales Forecast.
We will make marketing decisions for Bold next year – when it actually goes into production.
NOTE: Sales forecasts are purposely conservative. They reflect a pessimistic point of view.
Production schedules should reflect a rule of thumb – plan for 6 weeks of inventory. That is, have enough inventory on hand to meet demand for 6 weeks beyond the sales forecast. This gives you a 12% inventory cushion. For Baker, Marketing is forecasting demand at 1300, and you have 87 units already on hand in the warehouse. You want 1300 x 112% = 1456 available for sale. Since you have 87 on hand, you would schedule 1369 for production.
Since your Marketing forecast was conservative, it is unlikely that you will sell less than your forecast, but there is a good chance that you will stock out. Capstone does not take backorders. 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 6 weeks of inventory. You hope that your actual sales will fall between your sales forecast and your inventory levels.
In order to produce Bold next year, we need to purchase the factory this year because there is a one year lag between purchase and use of additional production capacity (this rule applies to both new and existing products).
Enter 300 in Buy/Sell Capacity for Bold, and 4.0 for New Automation Rating.
Your fiscal policies should maintain adequate working
capital reserves to avoid a liquidity crisis. Put another way, keep enough cash
on hand to avoid Capstone’s™ loan shark, Big Al, if your competitors clobber
you, resulting in large unexpected inventories in your warehouse. Inventories
are paid for when you build the product. Too much unexpected inventory leads to
zero cash with bills still outstanding. At that moment, Big Al arrives with a
smile, pays your bills, and leaves you with a loan and a stiff interest
payment. (In the
Here are some guidelines to help you avoid Big Al. Your proforma Balance Sheet predicts your financial condition at the end of this year. Make conservative marketing forecasts. Do not rely upon the computer’s forecast. 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 pessimistic expectations. This forces your proforma Balance Sheet to predict a future where your conservative sales forecast comes true and you are left with inventory. (If you sell the inventory, that’s wonderful.) Now look at the proforma Balance Sheet’s Cash and Inventory accounts. Drive your Cash position until it roughly equals your Inventory position. That is, either issue stock or borrow bonds until Cash equals Inventory. This creates an additional reserve for those times when your worst expectations are exceeded and disaster strikes.
Working capital can be thought of as the money that you need to operate day-to-day. In Capstone™ it is equivalent to your Current Assets – Cash, Accounts Receivable, and Inventory. 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 forecasting less cash and inventory. That is fine. The better your marketing forecasts, the less working capital you will require.
1) Issue a long-term bond to cover your investment in the new factory for Bold (6.6 million dollars). If you do not have sufficient new bond debt capacity, issue stock to cover the shortfall.
2) Since we are taking on debt to invest in a new factory, do not pay a dividend.
1) In the menu, click File | Save, or click the Save Decisions button in the toolbar.
2) Print proformas. You will find a Print Proformas button in the toolbar.
3) Upload your decisions to the Web site.
Change Baker’s New Size to 13.3.
Note that the new product Bold displays New Size and Performance cells in yellow. This tells you that the R&D project launched last year is still ongoing. Position changes cannot be made until the R&D project is completed.
Leave Baker’s price ($35), Promo (2000) and Sales (2000) figures the same as last year. Enter 1400 (1.4 M) for Your Sales Forecast
Price Boldat.$45. Set the Promo budget to $2250 and Sales budget to $2000. Enter 290 for Your Sales Forecast.
NOTE: Sales forecasts are purposely conservative. They reflect a pessimistic point of view.
Continue to use the Production rule of thumb – plan for 6 weeks of inventory.
For each product, schedule production using the formula: (UnitSalesForecast X 112%) – InventoryOnHand.
For Baker enter 1568 in Production Schedule. For Bold enter 324 in Production schedule.
For Bold, enter 200 in Buy/Sell capacity.
1) Match your plant investment with a stock issue. If you cannot raise adequate capital to match the investment, issue bonds to cover the shortfall.
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.
3) Adjust your cash position to meet the guideline from #2. If you are cash poor, issue additional stock or additional bonds. If you are cash rich, pay dividends.
4) Do not issue Short Term Debt.
1) In the menu, click File | Save, or click the Save Decisions button in the toolbar.
2) Print proformas. You will find a Print Proformas button in the toolbar.
3) Upload your decisions to the Web site.
Reduce Baker’s MTBF to 17000. Reduce Bold’s MTBF to 20000
Launch a new product: NAME - Beam NEW PERF - 10.0 NEW SIZE - 10.0 MTBF - 23000
Change Baker’s Promo budget to $1500 and Sales budget to $1500. Leave the price at $35. Enter 1500 for Your Sales Forecast.
Leave Bold’s price ($45), Promo ($2250), and Sales ($2000) budgets at last year’s levels. Enter 500 for Your Sales Forecast.
Continue to use the Production rule of thumb – plan for 6 weeks of inventory.
For each product, schedule production using the formula: (UnitSalesForecast X 112%) – InventoryOnHand.
For Baker, enter 1600 in Production Schedule (max overtime is 100%, thus for an 800 unit capacity line 1600 ids the max production available). For Bold enter 560 in Production Schedule.
Purchase a new factory for Beam this year so you can produce Beam next year when it emerges from R&D. Buy 450 units of capacity at an automation rating of 4.0.
1) You may be able to pay for your new plant with Cash on hand. If not, raise the additional capital with stock.
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.
3) Adjust your cash position to meet the guideline from #2. If you are cash poor, issue additional stock or additional bonds. If you are cash rich, pay dividends.
4) Do not issue Short Term Debt.
1) In the menu, click File | Save, or click the Save Decisions button in the toolbar.
2) Print proformas. You will find a Print Proformas button in the toolbar.
3) Upload your decisions to the Web site.
Your professor may want you to play another practice round. If so, continue the Product Life-cycle Differentiation vision.
Having executed the plan for two or three rounds, you are now in a position to critique 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?