Business Management

BizCafe The Business Essentials Simulation

Stuart W. James, Interpretive Simulations Michael Deighan, Interpretive Simulations

Charlottesville, Virginia, USA

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Copyright Notice

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About the Authors

Stu James is the founder of Interpretive Simulations, one of the leading publishers and developers of business simulations worldwide. Interpretive’s simulations are an integral part of the curriculum at many of the world’s top business schools in the areas of marketing, strategy, management, and international business. To date, over 400,000 people have experienced one of Interpretive’s simulations, and many rave about how the simulation was one of the best learning tools they have ever used.

On the academic front, Stu is currently Visiting Lecturer at the University of Michigan (EMBA), and at the Colgate-Darden Graduate School of Business at the University of Virginia (MBA Core Marketing and Custom Executive Programs). In addition, Stu has served at the Allen Center for Executive Education at the Kellogg School of Business, the China Europe International Business School (CEIBS), and the Cheung Kong Graduate School of Business (CKGSB).

Along with his academic work at the above business schools, Stu has also worked with American Honda, CIGNA, The Davidson Institute, General Electric, Genworth Financial, Harvard Business School, Navy Federal Credit Union, Pearson Prentice Hall, and McKinsey & Company. He is co- author of a number of leading simulation products including StratSimManagement, StratSimMarketing, StratSimChina, CountryManager, PharmaSim, HRSimSelection, MarketShare, BizCafe, and ServiceSim, all used at leading universities worldwide. Stu has extensive experience in facilitating simulation events, having directly worked with thousands of executive and MBA participants over the past 25 years.

Currently, Stu’s primary focus is running Management by the Numbers, Inc. (MBTN), a new venture that he co-founded with Paul Farris of the Darden School of Business. MBTN provides a self-paced, on-line environment where students and executives can master the numbers side of marketing and business metrics.

Stu and his family reside in Afton, Virginia at the foot of the Blue Ridge Mountains. In his spare time, Stu enjoys playing and teaching Irish traditional music and competing in triathlons.

Michael Deighan is a coauthor on the web-based editions of Airline, Corporation, Entrepreneur, and HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to convert these models to their current web-based versions. Michael joined Interpretive Simulations in 1989 as lead software developer and has served as manager of technology and content development.

He is coauthor on a number of Interpretive simulations: PharmaSim, BizCafe, StratSimMarketing, StratSimManagement, StratSimChina, CountryManager, and MarketShare. In addition to developing software, he has been teaching computer programming classes at Piedmont Virginia Community College in Charlottesville, Virginia, since 1990. Michael received his B.A. in German and Economics from Washington and Lee University, and an M.A. in German from the University of Virginia.

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Acknowledgements

A moment of appreciation...

We consider all of our customers as part of our product development team, and we are fortunate that they have put their time and effort into improving our product through their comments and suggestions. We will continue to incorporate improvements into coming releases of this product and welcome your comments and suggestions.

The authors would like to thank many people for their support in the development of this simulation. Payton James-Amberg, Karen Kelly, Kristen Knecht, Tony Naidu, Anne Louque, and Clayton Shumate were all part of the original development and testing team, and the simulation is significantly better due to their efforts and suggestions. Interpretive especially appreciates the early users of the simulation who provided invaluable feedback, with a special thanks to Jackie Shemko of Durham College and Bill Gregory of Indiana University Northwest. Many of their suggestions have been incorporated into the simulation.

The latest release of BizCafe incorporates the feedback of the 100,000+ users of the simulation since its initial release. Internally, we want to acknowledge the hard work and dedication of a number of Interpretive employees—especially Matt Travis, Johanna Ackert, Patrick Neeley, Rachel Hill, and David Luzader.

Stu James Mike Deighan

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Contents

Introduction 1 BizCafe Quick Start Guide 3 BizCafe Manual 4

Case 5 Specialty Coffee Market 6 Overview 7 Start-up Decisions 10 Weekly Decisions 12 Measuring Performance 14 Next Step 16

Business Essentials 17 Management 20 Marketing 22 Operations 24 Accounting 26 Planning and Integration 27

Appendix 29 Using BizCafe in a Group 30 Glossary 31

Printed June 20, 2018

BIZCAFE

Introduction

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BizCafe is a computer simulation that provides a great way to learn about running a business. It is designed to help you learn about the challenges and rewards of making good decisions in a small, service-based business. You will learn about management, operations, marketing, and accounting by running your own coffee shop for up to 16 simulated weeks.

In BizCafe you will typically be making decisions as part of a student management team. Teamwork is increasingly important in business today, and a valuable part of the BizCafe experience is learning how to make the best decisions when confronted with several different opinions. Your group will have to decide how to sort out your priorities and objectives in the context of a limited checkbook balance and a changing environment.

At start-up, your team will need to name your business and decide what furniture and equipment best meet your business objectives. You will then make weekly decisions to staff your cafe, price and promote your product, set shop hours, and purchase materials to operate the business. In addition, you may have to respond to issues raised by “incidents” (mini-cases) and complete supplemental assignments chosen by your instructor.

You will need to understand the business in order to make good decisions. Therefore, take some time to familiarize yourself with the case before beginning the simulation. While working through your decisions, you will find it helpful to refer to the manual for information and management tips.

To get the most out of the BizCafe experience, we recommend the approach outlined on the following page.

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BizCafe Quick Start Guide

1. READ THE CASE: • Industry background, • Company starting situation.

2. START-UP DECISION: • Access simulation from course website. • Create and enter a name for your business. • Choose furniture and espresso machine.

3. PERIOD DECISIONS: • Weekly Purchases, • Staffing and Hours, • Marketing, • Special Decision.

4. DECISION ANALYSIS: • Cash Budget, • Break-Even, • Decision Summary. Go back to Step 3 until satisfied with decisions.

5. SIMULATION ADVANCES: • Check schedule for times. • Complete decisions before deadline. If the simulation is over, skip to Step 7.

6. EVALUATE RESULTS: • Company reports, • Market reports. Go back to Step 3.

7. SIMULATION ENDS:

• Evaluate team performance. • Review what you have learned.

Your instructor may require additional assignments during the simulation. Check the schedule and messages on your course website for details.

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BizCafe Manual

The remainder of this manual is divided into the sections described below. Your understanding and success in BizCafe will be greatly enhanced by reading this manual before you begin the simulation. The manual will answer most of the questions students typically have during the simulation experience, and reading it has the added benefit of improving your competitiveness. Contextual help within the simulation interface and Frequently Asked Questions, “FAQs,” on your course site provide more information.

The Case presents a description of the coffee shop and the decisions you will be making as a manager of this business. A thorough understanding of your cafe’s situation will help you make better decisions. In addition to appearing in this manual, the case is also available within the simulation interface for your convenience.

Business Essentials provides a brief introduction to business management: what it is, why it is important, and what concepts will be used in the simulation. In addition, each of the basic functional areas covered in BizCafe are discussed.

The Appendix provides supplemental materials to help you with the simulation experience. There are tips on using the simulation as part of a group. The Glossary contains business terms that are used in the simulation.

BIZCAFE

Case

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Jane Valdez was ready for a change after 30 years of 12–15 hour workdays, 6 days a week. Jane had grown up in Collegetown and graduated from the local university there, majoring in engineering with a minor in business. After graduation, she worked at Hewlett-Packard and Apple Computer in the ’70s and ’80s. Like many of the technology workers of that era, she soon forged out on her own, starting several companies, failing at two, but hitting on a successful formula with her third venture—handheld computing devices for hospital applications. In 1995, she took her company public and eventually sold the company before the high-tech bubble burst. Soon thereafter, she was a founding partner of a successful venture capital firm, but now she is ready to return to her roots and slow down a bit.

However, she wants to share her success in a unique way, by helping college students learn about business by operating their own company. Select student teams will receive a $25,000 start-up loan at 10% interest to manage their own coffee shop for a year as an independent study for credit. Jane is confident that teams will have no trouble paying back the entire loan with interest by the end of the year.

Specialty Coffee Market

According to the National Coffee Association, 62% of people drink coffee daily, up from 57% in the previous year. “More of us are drinking coffee, and younger consumers appear to be leading the charge,” said Bill Murray, NCA president and CEO. “A steadily growing taste for gourmet varieties is also driving a wider trend toward specialty beverages.” Some other interesting statistics from the study include the largest one-year increase in past-day espresso—jumping from 18% to 24%; and more than half of all cups of coffee consumed in the past day were gourmet—59% in the past year vs. 46% five years ago.

The largest chain specialty coffee shops are Starbucks (26,000+ locations worldwide), Dunkin' Donuts (12,000+ locations), Tim Hortons (4,500+ locations), Costa Coffee (3,400+ locations), and McCafe (1,300+ locations). Despite the ubiquity of these coffee shop chains, there are many single owner or local small chain shops that are thriving, especially thanks to the growing “buy local” movement. Coffee shops not only provide a good cup of specialty coffee but often a place to socialize or work as well. Jane hopes her students can capitalize on these trends!

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Overview

Jane studied various locations and found a good potential storefront on Main Street, not far from the business school and on the downtown pedestrian mall. There are a number of retail establishments nearby such as restaurants, clothing shops, as well as service businesses.

The retail space available contains 1,000 sq. ft. with glass frontage on Main Street and 2nd Street, providing good visibility for pedestrian foot traffic (see layout). The space is next door to R.C. Fox Women’s Clothing, an independent retailer catering to more upscale buyers. Across the street is a trendy restaurant, Salamanca, which is primarily a dinner destination. Next to the restaurant is Readerwise Booksellers, an independent bookstore which has been in business over 20 years.

Rent is $24 per square foot per year, or $24,000 total for the year. A deposit equal to one month’s rent must be paid in advance, and monthly rent of $2,000 is due on the first day of each month. In addition to paying rent, the lessee (your company) will also be responsible for paying utilities—water and electricity. These are estimated at approximately $500/month

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based on historical usage of the restaurant that had previously occupied the location but may vary based on hours open and traffic. A $500 deposit is required for utilities.

Jane expects the coffee shop to be a success because of the good location downtown near retailers and the business school. For instance, businesspeople might stop by on their way to work or for a meeting place; students could go between classes and at night; and local residents would find the shop a great place to meet friends or relax while they are downtown shopping. She expects long-term demand to be primarily a function of the quality of the experience— atmosphere, length of wait, friendliness of the staff, etc.—and the price charged for the coffee.

The students have some sales information on a specialty drink shop that recently closed because the owner moved to another area. Though not a perfect comparison and incomplete, Jane believes this information will be helpful to the students when trying to calculate the necessary operational capacity for the shop. However, these values are from a more established business, and demand will certainly be different based on pricing, advertising, and quality of the experience in the coffee shop.

Pat’s Coffee and Chocolate: Weekly Demand (Cups Ordered) Week Starting Daily (M–F) Saturday Sunday Price Jan 1st 1000 750 550 $3.50 Jan 8th 1150 720 510 $3.50 Jan 15th 1070 780 530 $3.50 Jan 22nd 1045 950 690 $3.50

Jane also suggested to the students that the shop could stimulate additional demand through advertising and by offering special promotional deals. She has arranged for a team of information technology students to create a website for the business as a course project, and online and radio advertising can be used to drive traffic to the site.

In addition, the local weekly circular has a weekly poll on many of the local businesses including two awards given to specialty drink shops. Jane knows the importance of such awards for word- of-mouth and creating a “buzz” around a business. Jane wants to be sure her students are aiming to win one of these two awards:

• Best in town specialty drink—ambiance, • Best in town specialty drink—satisfaction.

Jane knows that the easy—and fun—part of running a business is creating the concept and setting up everything. However, she also knows that most retail shop success, especially for service oriented shops, is made “in the trenches”—the day-to-day running of the business. Will her students hire enough quality staff to serve the customers in a friendly and timely manner? Will they have enough supplies and inventory so they don’t run out of what customers want? Will they be able to handle the rushes before class and work? It sounds easy enough, but her students will likely need a cadre of part-time college students to work at the shop. Keeping

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them organized, attentive, and happy working there won’t be simple. Customer satisfaction is an important measure for capturing the experience that visitors have at the coffee shop. Long lines and impatient employees will surely have an impact on this measure.

Finally, the financials should add up over the course of the semester. Jane expects more expenditures relative to revenues in the early weeks, but as the weeks progress, she expects the cafe to become profitable. Students should keep a careful eye on their checkbook and cash balance. Eventually, daily receipts will need to cover the expenses such as rent, utilities, wages, advertising, and product costs (cost of goods sold). It will be a tall order but one Jane believes will be a great learning experience.

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Start-up Decisions

To start your business, you will need to decide on a name for your cafe, how to furnish it, and what equipment to buy for producing your product.

The name you choose should reflect the vision you have for your cafe and differentiate your product from your competitors’.

Jane found some used tables and chairs at a local thrift and antique shop for $2,000. You can purchase these or select from a variety of new boutique sets of tables and chairs. The new furniture costs $4,000. Both used and new furniture options will provide sufficient seating for the shop.

Your team will also need to purchase new equipment for producing your product. Jane found a new basic 2-cup espresso maker for $3,000, or you can purchase a 4-cup model that is potentially 30% faster for $6,000. There was already a counter, sink, and enough room in the storage area for coffee beans, cups, and other items necessary to run the business.

Equipment Options Model Capacity Speed Price Duo

2-cup Basic $3,000

Auto-Four

4-cup Up to 30% faster $6,000

The furniture and equipment you purchase at start-up may affect the operation and perception of your cafe. Make your selections carefully, as you may not have the opportunity to make changes later. The cost of the furniture and equipment will come out of your checking account before you open on January 1st and will be depreciated over five years.

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Default Used Furniture (Costs $2,000)

Used

New Furniture Options (Each Costs $4,000)

Modern

Green

Country

Elegant

Weekly Decisions

Management

Managers Each store starts with two full-time managers to cover Monday through Friday. The first management decision is what to pay your managers. One manager must always be on site from one hour before the shop opens until one hour after the shop closes. You are guaranteed to always have two managers, but their effectiveness (productivity) will depend upon the wages you pay them and how well you manage the server staff. If you decide to open on weekends, a third manager may be needed—depending on the total hours your cafe is open. Managers are salaried employees that work a minimum of 40 hours a week and you must pay the same salary to all managers.

Servers Managers cannot do all the work in the shop; you will need to hire staff to help serve customers. Each server is part-time and works 10 hours per week. In addition to the number of servers, you will need to set their wages. Wage rates should be competitive with other shops in the simulation. Pay your servers too little, and you might not attract the best employees while those you do hire may be more likely to change jobs. Workers like to be busy, but not stressed out, so be sure to hire an appropriate number of servers to meet demand.

Marketing

Pricing Coffee typically comes in three sizes: small, medium, and large. You start out offering medium- size cups and may be able offer additional sizes as the simulation progresses. Every week you will need to set a price for each size. Prices must be set such that the difference between sizes ranges from 20¢ to $1.00, and larger sizes must have higher prices. Jane has also set a minimum of $1.00 per cup and a maximum of $6.00 per cup. Be careful about increasing prices as it may frustrate and disappoint customers, but it’s better to have a price that works than one that doesn’t cover your fixed costs.

Advertising and Promotion Students may choose to advertise online or on one of the local radio stations. Radio spots can be used to promote awareness of the cafe. Online advertising includes listings on the web, search engine optimization, as well as banner and mobile ads. Special promotions—one for 50¢ off a cup of coffee, the other a 2-for-1 coupon—may be run simultaneously with the online ads.

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Creative Design These options allow you to use your more creative side. Your instructor may ask you to design a logo, advertisement, and coffee cup for your cafe. Logo and ad images may be created in a design program of your choice; saved in GIF, JPG, or PNG format; and dropped into the BizCafe program.

Operations

Shop Hours Students set the days and times the store will be open for business. The shop may open between 7 and 10 a.m. and close between 8 and 11 p.m. The hours Monday through Friday must all be the same. In addition, if your instructor allows, you will be able to open the store on the weekends and set those hours as well. Employees set-up for an hour before the cafe opens and clean-up for an hour after the cafe closes.

Coffee Purchase Coffee is ordered weekly in bulk, and you must specify the number of pounds to order. You must also choose coffee quality: good quality, high quality, or organic. Small cups use 1 shot of espresso, medium use 2 shots, and large cups use 3 shots. It is estimated that each shot of espresso requires approximately 7 grams of coffee, or about 1/64 of a pound—but you may want to allow a bit extra in case your servers spill some. Thus, a large size would use approximately 3/64 of a pound of coffee. Fresh coffee grounds are discarded immediately after use. Any coffee left at the end of the week is discarded for quality and freshness reasons. If you run short, local purchases are made at a higher cost than when ordering in bulk.

Cup Purchase Cups with a printed logo can be ordered in bulk on a weekly basis. Any unused cups will be kept in inventory until they are needed. If you don’t have enough logo cups, standard cups from a local vendor are available but at a slightly higher cost and without logos.

Special Decision

Incidents If your instructor selects this option, some weeks you may have an “incident,” which you will need to address. An incident is like a mini-case. Your team will need to discuss the issue presented and enter an appropriate response. Any costs associated with an incident will automatically appear in your checkbook just like any other expense.

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Measuring Performance

The success of your coffee shop will depend on the quality of your decisions in relation to the environment and in relation to each other. For example, when you are making pricing decisions, have you considered the impact a change has on other functional areas of your business such as staffing and product purchases? What impact does it have on demand for your product and net income? As the manager of a small coffee shop, you must make sure that all functional areas of your business are in line with your overall objectives and that all of your decisions are integrated—working toward producing the desired results.

There are a number of reports under the COMPANY menu that you can use to track performance as you operate your business. The Dashboard to provides an overview of your cafe’s performance on various measures. Tiles colored in green show improvement on the metric. You may also see your cafe’s rank within the Collegetown market (industry). The Dashboard also highlights happenings in the simulation for your industry and cafe.

Another essential tool is the Checkbook, used to monitor cash flow. Payments for rent, utilities, wages, advertising, product purchases, and interest are automatically made at the appropriate times during the month. Daily cash receipts from sales are taken to the bank’s night deposit and added to your balance the following morning—except Sunday. You can track your current cash balance at any time by reviewing the checkbook. The change in balance for the week will give you an idea of whether your sales receipts are sufficient to cover expenses. Keep in mind that some weeks will see more cash going out than others due to payments made once a month, such as rent, utilities, interest, and payroll taxes. Using the Cash Budget Analysis can help you anticipate these payments. If cash from the loan provided by Jane runs out, you may be eligible for an additional small business loan if you provide sufficient rationale to your lenders.

For a detailed analysis of sales, view the Daily Receipts report. It shows the daily capacity, or the maximum number of cups you could have sold based on your equipment and staff; the actual number of cups sold; and the average price of the coffee sold (including promotions and different cup sizes). Comparing cups served to capacity is one way to measure how busy your staff was for a given day. If you served at capacity, it probably means that your servers were always busy and some customers may have left due to the long lines.

The Weekly Purchases report, located under the DECISIONS menu, provides information about the coffee and cups used in the past week. Check this report before ordering cups as you may have enough in stock (inventory) to meet demand for the coming week. Unlike cups, coffee is perishable and any coffee not used during the week will be discarded at the end of the week. If

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you do not order enough coffee or cups to meet demand, a local source will be used to fulfill orders, though at a higher cost than purchasing materials ahead of time.

You will need more than weekly reports to ensure that you are making good business decisions. Fortunately, the university found a retired accountant who has offered to create a monthly income statement, balance sheet, and cash flow statement for you. The Income Statement shows revenues and expenses on an accrual rather than cash basis, so items are expensed in the period they are used, rather than when they are purchased. For example, each month shows a depreciation expense for the equipment you bought at start-up, and cups are expensed as they are used, rather than when they are purchased.

The Balance Sheet shows your firm’s assets, liabilities, and equity. It “balances” because assets must equal the sum of liabilities and equity. Examples of assets are cash, rent and utility deposits, inventory, and equipment. Liabilities include taxes payable and loans. Cumulative profits will appear under equity on the balance sheet. Unlike the income statement, which shows results over a specified period, the balance sheet is a snapshot of your business at a point in time.

The Cash Flow Statement (optional) shows the changes in your cafe’s cash position over the month. The statement begins with net income from the income statement, then adjusts for any differences in cash flow from operations to calculate net cash from operations. Then any adjustments due to investment activities and financing activities are made to arrive at the net increase or decrease in cash for the month.

In addition to viewing reports for your business, you will want to look at what is happening in the local market. Under the MARKET menu you will find important market and customer information. The Local Labor report provides the averages for manager and staff wages, average turnover rate (which tells you about how often the staff at local businesses is quitting), the area's minimum wage, and the number of employees for the other coffee shops in the area. The Customer Survey shows customer satisfaction with your cafe, an important measure of your performance. As the simulation progresses, the marketing research firm that surveys satisfaction may provide additional information depending on your decisions. The Industry Menus option shows the menus for all your competitors so you may compare competitor prices, coffee quality, and cafe hours with your own. Finally, under CREATIVE, Industry Branding is where you can view your competitors' logos, ads, cup design and menus once they have been designed.

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Next Steps

Jane Valdez is confident you will be successful in managing the coffee shop. While the fixed costs associated with running the shop are high, she is sure there is sufficient demand in the local market for your team to generate enough revenue within the next two months to have positive cash flow. Your experience in BizCafe will have wide application for business management:

• Make a good plan. • Coordinate your management, marketing, and operations decisions. • Analyze results. • Make adjustments.

Remember to enter start-up decisions.

Best of luck in running your cafe!

BIZCAFE

Business Essentials

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Why study business? To start with, all of us interact with businesses every day. Many of us will spend much of our lives working at a business. As consumers of products and services, we decide on a daily basis whether to purchase products and services and which particular ones to choose. Some of us may decide to study business because it is a fascinating and dynamic activity that offers us good career opportunities. Others may study business because it helps us better understand how the economy operates and how our actions and decisions may affect those around us.

No matter what your particular reason for choosing to study business, you will find that businesses share many common traits. These traits are common whether the business is small or large, for-profit or non-profit, or provides a product or service. Businesses need to consider what they want to accomplish (objectives), whom they serve (markets and other stakeholders), and how to create and deliver value for these markets and stakeholders. Within this general framework there are many variations, but keep these simple ideas in mind as you further explore topics in business.

BizCafe is an opportunity to explore business through the use of a dynamic computer simulation. In the simulation you will open and manage a coffee shop in a university town for up to 16 weeks. During this exploration you will learn about different aspects of running a business at a fundamental level and gain insights into questions such as:

• Whom should I hire? What should I pay them? • What price should I charge? How do people find out about me? • What should I purchase? What equipment do I need? • How do I keep track of money – my revenues and expenses?

Using business terminology, we might translate these questions into the different functional areas of a business at a fundamental level as follows:

• Management = Whom should I hire? What should I pay them? • Marketing = What price should I charge? How do people find out about me? • Operations = What should I purchase? What equipment do I need? • Accounting = How do I keep track of money – my revenues and expenses?

In no way do the questions reflect the full range of issues in each of these functional areas, but they do represent a good place to start, and that is the purpose of BizCafe—to allow you to experience some of the issues in running a business before your paycheck depends on it!

Before we go into more detail on these functional areas, we should talk about general organizational approaches used in companies. For instance, in a traditional functional organization, all of these functional managers would typically report to a President or CEO of the company. Thus, there would be a human resource manager (or Vice President), a marketing manager, an operations manager, etc. all of whom would report to the President of the company. However, there are alternatives to this approach, such as organizing by product or

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service, or by geographic area, for example. With BizCafe, we will focus on the more traditional functional approach, but realize that one of the most important decisions for a company is deciding how best to be organized.

The remainder of this section provides a brief description of each of these different functional areas of running a business. Your textbook and instructor will likely provide much more detail and examples, but for purposes of BizCafe, this general introduction to each of these basic functional areas will provide a helpful framework.

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Management

Although management could encompass running the entire business, in the context of BizCafe as well as many business courses, management often refers to the narrower definition of human resource management, or managing people. However, even with this narrower definition, management is one of the most challenging, complex, and important areas of running a business.

Let’s consider some of the key areas that (human resource) management encompasses. These include, but are not limited to, job analysis, recruitment and selection, compensation and benefits, training, and employee motivation and morale. There are many other important aspects to management, but these are common to almost all organizations, large or small. Let’s take a few moments to better define each of these in a broad sense.

First, within the organizational structure, someone must define both what general roles are necessary within the company as well as the specific tasks to be done by the employee in that role. Generally, this would be considered job analysis and would result in a series of job descriptions and job specifications. Once these are determined, the company will also need to understand how many employees will need to be provided in order to perform these functions. The expected level of work that needs to be done should drive the overall staffing level; however, determining that expected level of work is not a simple matter. Typically, a manager would look at expected sales and estimate the support necessary for that level of sales based on historical data or industry norms. It is important to remember that service quality and profitability objectives should also play a role in determining appropriate staffing levels.

Once the jobs and staffing levels have been decided, the next issue for management is how to recruit and select the best employees for the jobs. Recruiting would include on-campus recruiting, internet sites, newspaper ads, job fairs, and television advertising; it would also include developing supporting materials, such as brochures, and scheduling on-site visits.

Selection would encompass all the different ways of matching the best candidates for the jobs. This would include, for example, candidate testing and interviewing procedures to sift out which candidates are best qualified for the job as well as who are likely to accept and be retained.

This brings us to the next aspect of management, which relates to compensation and benefits. This would include deciding on appropriate salaries for different positions and candidates as well as choosing different benefit options for your employees. Compensation would also include incentive compensation and bonuses. All of these decisions will impact your ability to recruit, motivate, and retain employees.

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Employees also need training. This is especially important when they start, but training and education should be part of an on-going process of developing employees to maximize their potential. Employees are one of a corporation’s most important assets. To not develop their skills is not only poor motivation for employees but also often a poor investment decision.

Finally, related to training and compensation is motivation and company morale. Training and compensation are two ways to provide motivation, but obviously there are many other considerations for how to improve employee job satisfaction and morale. This topic begins to bring in behavior theory, company culture, managerial styles and leadership, all of which are topics in their own right. The bottom line is that there are many factors that will impact an employee’s performance. As a manager, one must take all of these into account to the best of one’s abilities to bring out the best in an employee as well as meet company objectives. As you may imagine, it is a daunting task to do well.

In BizCafe, management is simplified to two decisions that represent all the above issues at a very basic level. The first decision is hiring the right number of servers to keep your cafe running smoothly and to keep customers and staff satisfied. Second is determining the right amount to pay your staff (servers and managers) to motivate them and meet your financial objectives. Though simple, these two decisions will impact the performance of your business.

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Marketing

Marketing also encompasses a wide range of activities within an organization. At its most fundamental level, marketing is the process by which a company creates and distributes something of value to its customers. Let’s break this down into more manageable chunks.

Create

The creative aspect of marketing is what turns ideas into products and services that customers want. This would basically be the product—or service—development process. It could be something as simple as creating a new flavor of ice cream or as complex as managing the release of a new car model. How this process occurs varies considerably. Some companies just come up with ideas and market them; others follow a very deliberate product development process. A company must balance financial risks and rewards when deciding on appropriate product development processes. However, in addition to financial trade-offs, one must also consider the company culture and management style.

Distribute

Another aspect of marketing focuses on how to best deliver a product or service to a customer. For instance, could the item be purchased electronically, say on a website? Or does the product need to be consumed in person—such as in the case of an ice cream cone? Distribution covers all the issues around where a product or service is purchased and potentially consumed.

Value

Value refers to the relationship between the benefits of a product or service and the cost of that product or service. The benefits include not only the functionality of the product or service but also the emotional benefits. For instance, does someone derive more emotional benefit from wearing a certain brand of clothing vs. another even if they both have the same functionality? The cost of the product or service is most often associated with the price of it, but there are other costs to consider as well such as the time it might take to consumer or shop for the product. Pricing is a complex issue as well. For instance, a company might only be able to set the price to a distributor and not the ultimate price a customer pays for a product (indirect vs. direct marketing). Consider what influence the company has over the ultimate price in this situation and how the company can adjust its policies to achieve its goals.

Customers

By definition, a customer is someone who purchases a company’s product or service. But a company must think about which potential, or target, customers to seek. Who should they target in their advertising? What would be appealing to this potential customer? Customers are

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different and a company must take into consideration a potential customer’s needs during the product development process, their behaviors and preferences when designing promotion and distribution options, and their likelihood to pay a particular price when deciding on how much to charge for a product or service. For example, a company that produces women’s running shoes wouldn’t target high school football players in their advertisements and ask those football players about possible product improvements!

Often people in marketing refer to the 4 P’s of marketing: Product, Price, Promotion, and Place (distribution). You will find these concepts sprinkled about in the above paragraphs. These tend to be the focus of decisions in the marketing area, but remember that marketing is ultimately about creating something of value for a target customer. Whoever does this best is likely to have a successful business. Those who don’t provide this value often fail.

In BizCafe, marketing is simplified to two decisions that represent all the above issues at a very basic level. The first decision is the price to charge for your beverage. How much are your potential customers willing to spend to experience a cup of your coffee? How will the price impact demand for your product? How do different price points impact the profitability of your business? The second decision is how much to spend on advertising and promotion. How will people learn about your cafe? How can you entice them to buy from your cafe instead of the one down the street? These choices will also have a great impact on the success of your business.

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Operations

In a more traditional product-based business, operations would typically encompass the areas of manufacturing (capacity and production), quality control, purchasing and materials management, and storage and distribution of the product to the channel or customer in a timely manner. This process is often referred to as “supply chain management”—the overall process beginning with demand forecasting and ending with delivery of product to the customer. As more of the economy moves toward service-based businesses, we have to expand our view of what operations means. For instance, what would be considered operations in an organization such as a university or a hospital? When we think of service operations, the line between management and operations becomes even fuzzier. At this introductory level, we’ll focus more on the physical plant—the cafe itself—and purchasing, but realize that operations management is a vast and increasingly important area of business.

In order to have an effective operation or business, a business must be designed to meet a certain level of demand. This would include answering the fundamental operations question, “If our organization expects some level of sales, how will we be able to fulfill it with the quality and timeliness our customers expect?” Thus, operations management begins with having a good understanding of expected demand. This is not a simple matter. For instance, marketing may provide a sales forecast for the next year. That is a good starting point, but how accurate are those sales forecasts? More importantly, for operations, it may not be the annual demand that is the issue, but instead, other time segments such as months, days, or even hours. Perhaps the issue is more peak demand (capacity) such as is the case for a utility company. These are the types of issues that keep operations managers up at night.

Once demand has been considered, this must be translated into the different operational aspects necessary to meet demand such as the physical plant and equipment, amounts and timing of purchases, systems, quality considerations, employees, training, etc. Often, very complex information systems and statistical processes go into both the planning process and the day-to-day operations.

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In BizCafe, operational decisions are simplified to a few basic issues that will give you a glimpse into the challenges of operations. One set of issues centers on the cafe and equipment. For instance, what hours will you open? What furniture will you purchase? Which espresso machine is the appropriate choice? The second set of issues is around demand forecasting, purchasing, and inventory. Here you will make decisions about how much coffee to purchase as well as the quality of the coffee. Since coffee is perishable, forecasting demand as accurately as possible is important, as any unused coffee must be discarded at the end of the week. In addition, you will decide the appropriate approach for purchasing cups. Do you order in bulk at a lower price—with the added benefit of a logo printed on the cup—or purchase them as necessary locally at a slightly higher cost.

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Accounting

Accounting serves two primary purposes. First, all businesses have certain state, local, and national reporting obligations. Examples of these would be yearly corporate income tax returns, as well as state unemployment, Social Security, and Medicare reporting requirements. Without accounting systems, a business could not accurately fulfill these filing requirements. Second, a well-designed accounting system also provides a manager with important information about the state of the business. This information may be in the form of basic financial statements such as an income statement or balance sheet, or they may be more specific in nature such as costing, vendor, or customer analysis reports.

Another issue to consider with regard to accounting is whether a system is cash-based or accrual. Cash-based is probably the easier of the two to understand. Money that is received is counted or recognized as income or revenue at the time it is deposited. Money that is spent is counted as an expense when it is spent. An accrual accounting system is somewhat subtler in nature. In an accrual system, the idea is to recognize revenues and expenses when they are used. For instance, if a sale is made, but payment is delayed by 90 days, the sale is still recognized at the time of the sale rather than when payment is received. On the expense side, issues such as depreciation come into play. Depreciation, or expensing a purchase over time, is used for assets such as computers or equipment that have a useful life of more than one year. For example, a computer might cost $1,000, but the expense is spread over five years—$200 per year—because it is likely to be used for approximately five years.

In BizCafe, accounting is captured in four reports. One is your checkbook. This represents your cash-based accounting system. You start out with cash in the bank from a loan. More cash comes in when coffee is sold. Cash goes out when items are purchased or when employees are paid. You may look at your checkbook at any time, and it gives you an up-to-date balance of how much you have in your account, how much money was deposited, and how much was spent. In addition to your checkbook, you also have an accountant who prepares an income statement, balance sheet, and cash flow statement monthly for your cafe. Thus, at the end of each month, you will be able to see at a glance your revenues and expenses, the balances of key accounts, and the changes in your cafe’s cash position. Though simple, these views of your financial health will provide you with a great introduction as to why accounting is such an important tool for measuring the performance of a company.

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Planning and Integration

All of these functional decisions and processes will take place in the simulation. How well your business operates will be determined by the quality of these decisions in relation to the environment (market, competition) and in relation to each other (integration). The overall planning and integration process has two basic steps: (1) analyzing the situation and (2) choosing a course of action. This process is much more detailed and complex than the two simple steps, but if you remember that everything you are doing in business planning is part of one of these two steps, you should be better able to work through this process.

Analyze the Situation

As a business manager, your primary focus when analyzing the situation is to gather information to help you identify opportunities that will help your company be successful. The purpose of this information is to help you make better decisions as a manager. For instance, what information would be helpful to have when deciding about the price to charge? You might want to know how much it costs you to make what you sell (cost of goods sold), how much your competitors charge, and how customers respond to different prices. All of these would go into your decision process leading us to point number two, choosing a course of action.

Choosing a Course of Action

To make a good decision, three circumstances must be present. First, as discussed above, one needs to have good information regarding the decision. Second, one must have an objective. With an objective or goal in mind, one can think about how the decision would likely impact the ability to achieve the objective. Third, the person making the decision must be able to understand the information, accept the objective, and be able to discern the likely impacts of different decisions on possible outcomes. This is in no way a simple task. Typically, the person making the decision will not have perfect or complete information, but a decision still must be made. So a decision-maker must also learn how to be comfortable choosing a course of action in the imperfect world of reality while constantly looking for ways to make better decisions.

Integration

Finally, a general manager must think about integration of decisions. If we go back to our pricing decision, one element we left out was the likely impact of a change in price on the other functional areas. For instance, if you decided to lower the price by 20%, what impact would that have on demand? On your operations? On your net income? The general manager must make sure that all of these functional decisions are in line with the company's overall objectives and that all of the decisions are integrated.

BIZCAFE

Appendix

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Using BizCafe in a Group

If you are using BizCafe in a classroom setting, you will likely be asked by your instructor to work in groups. Each group will pool its skills and resources to manage collectively the management, marketing, and operations roles. Thus, the specific decisions your group will make depend on the responsibilities you are assigned.

Group work is the way business is most often conducted today. It can be rewarding and frustrating. It is, therefore, critical that you learn how to make every group experience a success.

One of the most frequent complaints with group work is the amount of time wasted in trying to organize and make decisions. There are also complaints that individual members are not “pulling their weight.” To reduce these problems, your group should answer the following questions in your first meeting:

• When, where, and how often should we meet? • How should we efficiently and effectively conduct our meetings? • Should we choose a general manager? What authority should this person have? • How should we divide the tasks among group members? • How do we resolve issues and make final decisions? • How do we encourage and maintain a high quality of contribution? • How will we deal with personal conflicts among group members?

Over time the group should assess whether it is functioning efficiently and effectively. The group may have to reorganize to best meet the current needs of the business as your product portfolio changes, new competitive situations arise, and more information becomes available.

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Glossary

Term Definition

Accounting The way in which a business keeps track of and provides important information about its financial state and fulfills its state, local and national reporting obligations.

Accrual Accounting System

An accounting system wherein money in the form of revenues and expenses is counted when it is used, not necessarily when payment is made or received. A sale is recognized at the time of the sale, even if payment comes later.

Ambiance The mood, character, quality, tone, and atmosphere of an environment.

Balance Sheet A snapshot of your organization at a particular point in time, containing the current balance in your asset, liabilities and shareholder equity accounts.

Break-Even Analysis A way to calculate either the price you need to charge at a particular level of sales—or, conversely, the number of units you need to sell at a particular price—to cover fixed costs.

Capacity The estimation of how many cups of coffee your shop can handle—or could have handled—serving on a given day based on your equipment and staff.

Cash-Based Accounting System

In this system money that is received is counted or recognized as income or revenue at the time it is deposited. Money that is spent is counted as an expense when it is spent.

Checkbook This represents your cash-based accounting system. It is a record of all receipts and disbursements for the current week. Compensation Something given or received as an equivalent for services or debt.

Competition Nearby businesses of a similar nature producing a similar product, which may attract customers that would otherwise support your business.

Cost of Goods How much it costs to make the product, or create the service, that is being sold. Customers Someone who purchases a company’s product or service. Customer Analysis Report

An evaluation of who the customers are and what they are looking for in regard to a particular product.

Customer Satisfaction The extent to which a business is fulfilling the needs and desires of its customers.

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Term Definition

Depreciation

A decrease or loss in value because of age, wear, or market conditions. For accounting purposes, there are different methods by and time periods over which the value of an asset is depreciated. For example, an asset worth $1,000 might be depreciated over 5 years using "straight-line" depreciation. In this situation, each year $200 of the asset’s value would be depreciated.

Disbursements Payments or expenses costing the business money.

Distribution Where a product or service is purchased and everything that leads up to, and helps achieve, this action.

Expenditures All of the expenses of a company; what was actually spent in a fiscal period. Expenses Costs and charges that you must pay. Fixed Costs Costs that remain unchanged with volume sold. Forecasting Predictions of spending or costs based on calculations in advance.

Human Resources Management

The management of people, which includes: job analysis, recruitment and selection, compensation and benefits, training, and employee motivation and morale.

Income Statement A report of a firm’s overall results for a period, including a breakdown of major expenditures and a calculated value of the net income.

Inventory The stock and materials on hand at a business, including raw materials, finished goods, etc. Inventory would be listed as an asset on the balance sheet of the company.

Job Description A written description of what a job entails, including what tasks and skills are expected of an employee.

Management

In BizCafe, management often refers specifically to the aspect of managing people—such as hiring, setting wages, etc. However, more generally, management often refers to the managing of people, products, materials, and any other number of items.

Manufacturing Capacity

The maximum amount that can be produced or manufactured in a particular period of time.

Materials Management Managing the materials in a business, from raw materials to the finished product.

Organic Grown using fertilizers and pesticides that are strictly of animal or vegetable origin, thereby creating a product without the use of drugs, hormones, or synthetic chemicals

Operations The areas of manufacturing, quality control, purchasing and materials management, and storage and distribution of the product to the channel or customer in a timely manner.

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Term Definition

Place Refers to distribution, or how products get to the stores so that it is convenient for us to buy.

Price Involves all factors that affect how much is paid for a product. The amount of money a person is charged for a product or service.

Product The bundle of attributes that we buy to satisfy our needs and wants, be it an item, a service, or intellectual property.

Product (or Service) Development Process

The process by which a business takes products from ideas to products that are sold. Usually this process is well defined and used repeatedly.

Promotion

Involves all activities that companies use to communicate with us—from advertising to sales people—and the activities companies use to get us to buy from them. In BizCafe, a coupon for a special deal such as $1 off and the advertising associated with it is an example of a promotional activity.

Purchasing Ordering supplies and other raw materials.

Quality Control The process by which a business ensures that its products are meeting standards. Receipts Revenues, or money coming into the business.

Recruitment The process of discovering employees and drawing them to your business to work. Revenues A particular item or source of income.

Stakeholders Those who have invested in a business and have an interest in profits. In BizCafe, this would include Jane Valdez.

Value The relationship between the benefits of a product or service and the cost of that product or service. These include functionality and emotional benefits.