Executive business simulation

The purpose of this briefing paper is to prepare you for your participation in a business simulation that is being used in your postgraduate programmes and which supports four modules:

· Accounting for Managers (ACFI5020)

· Corporate Performance Management (ACFI5017)

· Evaluation of Management Accounting (ACFI5006)

Briefing on the modules will be given at a mandatory introductory session that will be held in the Hugh Aston Lecture Theatre 0.10 on Friday 6th October 2017 commencing at 5.00 p.m. and lasting for around 1.5 hours. You are also strongly advised to read through this document ahead of the business start up sessions.

The purpose of the briefing will be to formally introduce you to the simulation and to discuss what you might expect to encounter along the way. You will also be given a demonstration of how the simulation works and an explanation of the decisions that you will be required to make each trading year. The group requirements will also be explained in this session and you will have an opportunity to ask questions about the simulation and can then try it out in your teams.

There will be approximately 300 students participating in the simulation activity, divided into 54 teams. Six different "worlds" will be established and nine teams will compete in each world. Each world will have a unique name and each team will be allocated a unique team number in the range 1 to 9.

The details of each world are:

Note: if you have any questions about the simulation paperwork, the making of your decisions or your business results please send them by email to [email protected] and I will endeavor to respond within 24 hours. Please do not send multiple emails from the same teams and in the ‘Subject area’ please identify your World and Team number (e.g. Simulation Neptune 3).

The business simulation to be used is Executive, which is based on a simplified model of the European automobile industry. The simulation is as realistic and current as possible. Teams of 5-6 students will compete in an interactive marketplace, competing against each other and the background market competition that represents leading manufacturers, e.g. BMW, Ford, VW.

You will work as part of a cross-functional management team who collectively has the opportunity to establish and manage a design, engineering, manufacturing and sales distribution business that competes in the European passenger car market. Each team/company will name its own enterprise and design its logo and business strap line (e.g. TESCO’s is Every Little Helps). Each team member will assume specific management roles within the company (see Appendix I for a list of the roles available).

The decisions you will make during this exercise cover a wide range of business skill areas from finance to marketing, business strategy, risk management, human resources, effective interpretation of information, presentation/communication skills.

There is the opportunity to explore, experiment and then evaluate your knowledge, judgment and decision-making before submitting a set of business decisions for processing through the master simulation. Your company will make, distribute and sell cars into the European market. Responsibilities include decisions on a wide variety of aspects, for example:

· the sector of the market to be targeted;

· the type and quality of product to be produced;

· its price and how it will be promoted to the market;

· the size of the workforce and the level of productivity;

· the investment in manufacturing facilities and research and development;

· the financial parameters, e.g. the level of borrowing and payment terms for customers and suppliers, and investment plan

Prior to the start of the simulation you will be asked to determine the type of passenger car company you want to establish and prepare a brief summary of your outline business strategy and plan (to be submitted by 31st October 2017). Your outline strategy and plan will contain your business values, a note of the key stakeholders and their needs, the market(s) you plan to operate in, the types of products you intend to produce and sell and a note of some of the risks and threats you expect to face during the activity.

The simulation will run for 5 years with each trading period (50 weeks) representing a full calendar financial year. The annual financial year runs from 1st October to 30th September and you will commence trading in financial year 2017/18. The final year of trading will be financial year 2021/22.

The simulation will operate over the internet and any communication to you will come via the Blackboard facility and you will be required to submit your annual business decisions electronically to a timetable for processing. A set of financial statements and business reports will be produced by the simulation and be available to you within a few days. You will then review these statements and reports and, for the first 4 trading years, prepare an annual management report considering your results and describing your achievements and challenges (this is for your own use). You will have to submit a Summary Management Report on 26th January 2018. A standard template for this report is shown in Appendix II and is available on Blackboard. You will also be asked to review how your team is working on the business simulation activity and to note your learning experiences. We shall provide you with a pack that will facilitate this review activity.

A guide to the decisions to be made is given in Section 5 of this document and comprehensive help screens are providing within the simulation. Answers to the most commonly asked questions are given in Appendix X, page 39

TIMETABLE OF EVENTS

Here is a summary of the key dates and events that you will experience during the simulation.

Time: 5.00 – 6.00 p.m.

Location: Hugh Aston Lecture Theatre 0.10

You are required to prepare and submit a written outline of your business strategy and plan (not more than 8 PowerPoint slides plus a header page) and it should address the following:

· the name of your company, its logo and strap line

· list of your management team and their Executive roles (see Appendix I for details of the available roles)

· your mission statement

· a list of the key stakeholders (those who have an interest in your success) and their primary needs

· an indication of the market sectors you intend to compete in initially and the type of products you intend to offer into those markets (you are required to launch two in year 1)

· a summary of the potential internal (team) and external (market) risks, challenges and threats that you expect to face during the simulation activity

· your financial plans – borrowing and investment

· 3 team learning goals that you would like to achieve from the simulation module and a statement of what success will look like for your team

A standard PowerPoint template will be available on Blackboard to enable you to prepare and submit your business strategy and plan outline.

Each team will receive an email notification of its unique password that will give access to their particular simulation file. Please make sure you keep this safe as you are responsible for the security of your files. Any team who is found to have accessed another team’s files will face severe consequences.

There will be an opportunity to make a pilot set of decisions during the sessions between Friday, 6th and Wednesday, 11th October to enable you to become familiar with the simulation decision-making process and to gain experience of how the simulation works. This will be a limited time option and will be clearly explained to you during the business simulation briefing workshop.

Each team will be required to prepare and submit a Summary Management report, after the final results of the decisions are known. This report should be produced to a standard template (see Appendix II) and will cover the following aspects:

· Business results for current and prior year covering:

· No. of employees

· Sales – volume and value

· Gross profit £

· Operating profit £

· Cash at bank

· Outstanding level of debt

· Value of unsold stock at year end £

· Share price

· Key financial ratios

· Gross profit margin %

· Sales margin %

· Return on shareholders funds %

· Return on capital employed %

· Current ratio

· Gearing ratio

· Market value

· Earnings Per Share (EPS)

In order to encourage group ownership of your decisions you should also provide a brief commentary on performance, note of any particular challenges that the company faces and your priorities for the following trading period. This will inform your following year's decisions.

There is a sample set of management and financial reports included in Appendix VIII. A summary of the main financial ratios we shall be expecting you to work and become familiar with during the simulation activity are provided in Appendix IX.

As an appendix to the report you will also be required to attach details of your group meetings throughout the semester. This should detail (for each meeting) :

· Date

· Location

· Agenda

· A list of group members present

· Brief minutes of the meeting

There will also be an element of peer assessment within the group work and group members will be required to provide feedback as part of the appendices to the report. The relevant form for the assessment will be distributed at an appropriate time.

Each team will be required to prepare and make a 10-minute presentation to a panel of that will cover these areas:

· Original strategy and plan

· Summary of financial and business results achieved and the principal reasons for them

· A brief overview on how the dynamics of the market the external macro environment impacted the performance of the business

· Strategic overview of the future plans for the business

· Summary of your learning experiences

We will issue a PowerPoint template to enable you formulate the presentation

Time: 5.00 to 6.00 pm

Location: HU3.03

We will assemble to announce the results and the winning teams will receive their awards. The winning teams will be decided on business performance within the simulation and not on academic performance.

We will assess each team’s academic performance according to the generic postgraduate grade descriptors and the work will be weighted as follows:

This simulation accounts for 30% of your overall module grade (AFM, CPM, EMA) as follows:

1. Business Strategy and Plan Outline - 10 %

2. Summary Reports - 10 %

3. Final Presentation - 10 %

In assessing the financial and general business performance of the groups (for the presentation evening) we shall take into account the following principal performance criteria :

· Return on Capital Employed calculated as Operating Profit/Total Capital Employed. Capital Employed is defined as the total sum of shareholders equity and long-term debt – 20 % weighting

· Overall market share expressed as a % of the total available market – 20% weighting

· Productivity index as published by the simulation – 10 % weighting

· Gross profit margin expressed as a % of sales revenue – 10% weighting

· Earnings per share – profit after tax divided by the number of shares in issue – 15% weighting

· Market value of equity – 25% weighting

5.1 BACKGROUND TO THE EUROPEAN MARKETPLACE

In 2008 and 2009, Europe was the world's largest passenger car market in terms of sales, taking over from the USA where the market was falling. However, from 2007 to 2013 sales in Europe shrank year on year and the low levels experienced in 2013 were last seen in 1993. China became the largest car market in the world in 2010 and has experienced rapid growth since then with sales of 27.8m in 2016, however, there are signs that the rate of growth is slowing slightly. Europe maintained second position for 2010 and 2011 but in 2012 the American market began a slow recovery and replaced Europe in second place, a trend that has continued to date. The gap between the US and Europe narrowed slightly in 2014 with sales of 16.4m in the US and just over 13m in Europe and this margin has continued to date, figures for 2015 were 17.4m in the US and 14.2m in Europe and in 2016 were 17.6m in the US and 15.1m in Europe.

However, despite increasing sales, the European automotive marketplace remains an extremely competitive arena with few companies managing to post a consistent pattern of profitability within their European operations.

Austerity measures have eased but most of the major European Governments are still trying to reduce debt, therefore, cuts are still being made in government spending and although consumer confidence is returning there is still an element of caution throughout. Unemployment figures are, in general, falling in most economies but levels are still high, especially amongst the young. There is optimism that economic growth and the trend of lower unemployment will continue but progress is likely to be slow and there will continue to be large cross country differences in the near future. The UK's decision to leave the EU is also raising concerns for economic stability over the next couple of years, at the moment this is proving unfounded but that could change, only time will tell.

[For the purposes of the simulation, the European marketplace comprises the European Union (26-28 countries as in some cases no data is available from Cyprus and Malta) + the EFTA countries (Iceland, Norway and Switzerland). Figures do not include the European countries that are not part of the EU. Please note that some sources will report the EU15 figures only, some will include the EU15 + EFTA and some will include the whole of Europe, therefore figures quoted could be different to the ones provided in this document.]

The market is undergoing a period of significant change and turmoil. In 2008 European car sales figures were easily the worst for over a decade at 14.6million and gloomy forecasts for 2009 proved to be well founded with the whole market falling yet again. There was some recovery at the start of 2010, mainly as a direct result of Government incentives, the most successful being the scrappage schemes that were introduced in 2009 and continued through part of 2010. However, once the schemes ended, the industry was left still suffering from over capacity and a crowded marketplace, forcing several European companies to reduce their workforce and production and enforce new working practices. The year finally ended with registrations falling to 13.8 million (12.5m EU only).

New product ranges and upgrades to established models stimulated growth in the first quarter of 2011 but eventually registrations fell by 1.5% to 13.6 million (12.4m EU only) for the whole year. There was some optimism as sales improved on 2010 figures in the stronger economies, with sales generally reflecting the economic conditions within individual countries, but this optimism was short lived as 2012 saw a decline in nearly all countries, with the overall market falling by 8.1% to 12.5 million (11.3m EU only). 2013 saw a further 1.6% fall to 12.3 million (11.9m EU only), the lowest level since 1995 and 25% below the 2007 peak. Of the leading EU countries only the UK and Spain saw an increase in registrations – a significant 10.8% increase in the UK and a more modest 3.3% in Spain. However, the last 4 months of 2013 saw the beginning of some growths. Fortunately, the trend continued into 2014 and the year ended with registrations of just under 13 million (12.5m EU only), an upturn of 5.6% and the first increase since 2007.

2015 brought more optimism, with registrations rising by 9.2% to a total of 14.2 million (13.7m EU only). The trend continued throughout 2016, with sales increasing month on month (apart from a negligible fall in October), and the year ended with a 6.5% increase to a total of 15.1 units (14.6m EU only), the highest level for 9 years and the third consecutive year of growth. The increase in sales throughout the year was largely sustained across the whole region. Looking at the five EU major markets, the strongest growth was in Italy and Spain where registrations increased by 15.8% and 10.9% respectively. France saw a 5.1% rise, Germany 4.5% and the UK 2.3% (the slow-down in the UK market is likely to have been a result of concern over the EU referendum and the resulting Brexit vote). However, not all brands benefited equally from the success and many mainstream brands actually lost market share.

Sales in the first quarter of 2017 rose by 8.2% compared to the same period in 2016. However, new registrations in April plummeted, in most cases this was explained by the positioning of the Easter holiday but in the UK, where sales fell by 20%, it was a result of the introduction of new tax legislation that will affect all cars registered from April 2017, which also accounted for the record-high sales in March, just prior to the new taxes. Overall, the figures to date (an increase of 4.7% for the first four months of the year) suggest that despite political instability and economic uncertainty, consumer confidence remains robust – for the moment. Of particular interest is the fact that registrations of alternative fuel vehicles rose by 37.6% in the first quarter of 2017.

5.4 Forecast

It is predicted that in 2017 as a whole, the market is most likely to remain flat, with a maximum increase of 1%. Sales in the UK are predicted to fall as a result of the Brexit negotiations, a weak £sterling and new tax laws. The fact that UK new registrations in the latter half of 2016 were very much driven by fleet sales reinforces this forecast. If there is a downturn in the UK, it will also affect manufacturers' revenue in other European countries, especially Germany, as the UK is a major export country for BMW and VW.

There is also concern that much of the recent increased sales volume could well be due to heavy discounting, which is not a feasible policy long term. It must also be remembered that tough economic conditions still prevail in parts of Europe and car makers also face the problem that there is a shift away from driving among older Europeans and falling interest in car ownership among the young, especially in regions of high youth unemployment. Also, cars are now more durable so consumers do not need to buy a new car as often unless by personal choice.

Sustained recovery will depend on how quickly European markets emerge from the economic problems of recent times and whether new products are good enough to attract new buyers and recapture old ones. Prior to the crisis of 2008/9, the European car market experienced a period of strong growth with companies launching a number of new models with the aim of enticing consumers into purchasing new vehicles. The success of the Nissan Qashqai, the Renault Captur and the Fiat 500X proves that this can still be achieved and the leading manufacturers continue to work on this premise. Recent additions to the market include the 2017 World Car of the Year, the Jaguar F-Pace and the 2017 European Car of the Year, the updated Peugeot 3008. New/upgraded models to be launched later in 2017 include the Audi A8, the Hyundai Kona, BMW’s 2-series and X3, the Citroen Picassa (redesigned from MPV to a fashionable crossover) and the Kia Picanto, which is to have a major facelift to appeal to younger buyers. Models planned for launch in 2018 include all electric offerings from Audi (the e-tron) and Jaguar (the I-Pace), the new Audi Q8, BMW X2 and X7, as well as relaunches of the Dacia/Renault Duster, Ford’s Fiesta and Focus, the Mercedes A-class and the Vauxhall/Opel Corsa. This is all with the intention of boosting sales throughout Europe.

The recent fall in fuel prices is likely to take some pressure off larger models but there are still the higher taxation levels to take into consideration. In addition, as fuel prices begin to creep back up it is likely that many will still err on the side of caution and continue to look for fuel efficient vehicles. The sales of diesel engines may fall as a consequence of the new EU legislation designed to reduce nitrogen dioxide levels/pollution which will see an increase in the cost of diesel fuel and higher taxation on diesel cars, as well as increased parking charges for diesel cars that fall below the recommended emission levels. Manufacturers have the opportunity to exploit this market by developing fuel-efficient vehicles, lower emission diesel engines and engines powered by alternative fuels. It should also not be forgotten that when times are difficult buyers will look for a safe option where reliability is assured, as is the case with BMW and, until the recent emissions scandal which has had a negative effect on sales, VW.

These factors show a way forward and there is optimism in the market but it is expected that 2007 levels will not be achieved from at least another five years.

It is into this environment that you are coming to market… As they say… interesting times make for interesting learning experiences. Enjoy!

All teams will begin from the same position. All costs are given on the Cost & Data Sheet, which can be accessed via the Reports Menu in the simulation (select Reports: View Current Reports: Current Cost & Data Sheet). The Cost & Data Sheet for your first decision period is given in Appendix IV (page 22).

A decision form summarising the decisions to be made is given in Appendix V on page 24. The document will be available on Blackboard and you are strongly advised to keep a record of all the decisions made for your reference.

· A green field site

· £500 million in the bank raised from the issue of 5 million £100 shares.

· No production facilities

· No workforce

· All companies (teams) will sell cars into the European marketplace.

· Production facilities are in the UK.

· The currency is £sterling.

· All costs rise with inflation annually.

· In the first year of operation two different models of car must be produced. A maximum of five models is allowed but only one new model can be introduced each subsequent year and must be funded 12 months prior to launch – full details are given on page 11.

The marketplace is the European Community which currently has the capacity of between 11m and 16m new car sales per annum, with a prediction of between 14m and 16m for the forthcoming year. Market research informs us that statistically the car market is divided into 16 sectors relating to the car platform/size and the target age group, as identified in the following grid. The first objective is to identify where each product's potential market lies, one of the sectors must be selected as the target market for each car model. This is probably the most important decision to be made by the company as it will be used as the basis for many other production and marketing decisions.

The car sizes are categorised by selling price ranges as follows, although they can overlap (e.g. the very hi tech or sporty models of each size can be higher than the averages given here) :

City: up to £23,000; Medium: £14,000-£34,000; Large: £20,000-£60,000; Luxury: £40,000 to over £100,000.

NB : Once selected, the car size cannot be changed but it can be re-targeted at a different age group.

At the beginning of the exercise, the market share of each sector is as follows :

Note : When making and submitting decisions online you will have to enter the actual car size and target age group but the market sectors in the table will be referred to in the results/reports.

The sector sizes change over time and up-to-date information is provided on the Company Report that is generated at the end of each year.

Design features, including body shape and engine size, may be chosen and options can be made available for purchasers to add to the basic car. In addition, research and development projects can be applied to increase each model's perceived value.

Designs & Options

Design features, including body shape and engine size, may be chosen and options can be made available for purchasers to add to the basic car. The cost of model designs and options are listed on the Cost & Data Sheet.

Designs

· Every car produced must be built with a minimum of one of the body designs and one of the engine sizes offered

· More than one design and engine size can be offered to increase customer choice

· The percentage "take up" of each shape and engine size will depend on their popularity and the additional cost will vary accordingly

· There will be a body design and an engine cost added to every car. For cost calculation purposes, use an average of the cost of the designs offered plus an average of the engine sizes offered

Options

· Not all cars will be built with all the options offered - only those chosen by each individual customer (some cars may leave the factory without any additional options at all)

· The proportion added will depend on the popularity and appropriateness of the options offered

· The cost of including options per car will only be a percentage of the total. For cost calculation purposes, an average of a 33% uptake can be used

Option Packages

Some of the customer choice options are available in the form of packages. Details of these are given in the table below.

Some options are offered individually as well as part of a pack. This is because some buyers may not want to buy the whole pack, just one element of it. However, the packs offer good value for money and encourage customers to spend more than if they were just going to choose one option.

Research & Development

Investment can be made in research and development projects for each model. When successful it will increase the model's value in the long-term. However, both time and money must be spent on each project and it is possible that they will fail. There are five 'failsafe' projects that are guaranteed to be successful :

1. Product Relaunch

2. Facelift

10. Fuel Efficient Engine

21. Ultra Low Emissions

27. Improved Build Quality

If a project does fail it is possible to re-invest and begin again or accept that the investment is lost.

R&D projects are divided into two phases :

Phase 1: The research phase which is concerned with the initial work in preparing the project. This is likely to include matters like customer and technical research, prototype development and testing in a laboratory.

Phase 2 The development phase which is concerned with taking the prototype work and developing it for production. This is likely to include design engineering, application, material selection and tooling for manufacturing.

Details of the times needed for each phase for individual projects is given in Appendix VI, page 26. At the end of each year, an R&D report will be provided that gives the year that the project is expected to come online (or whether it has failed). You have the option to stop any research and development project at any time before it is available (online) – the money you have spent will be considered as a loss and written off.

The research phase of projects only needs to be carried out for one model as it is a company venture that can be used for all products. When a project is being researched on one model, the R&D decision screen for the other models will show it as "Being Researched" and it will not be available for selection until the research phase has been completed (or fails).

Once the research phase is complete, it will become available to begin the development phase for other models, as required. The project will show as (researched) on the R&D screen and can be added to the models by selecting it as usual. The project will then come online on the additional vehicles once the development time is complete. Please note that it is still possible that a project will fail for one or more of the other models.

There are three exceptions, which are model specific and research needs to be carried out on every model as required. They are :

1. Product Relaunch

2. Facelift

27. Improved Quality Build

NB : Until the project is online, the box must be checked for it to continue, if unchecked the project will be stopped and the money already invested will be lost.

Once online, the Product Relaunch project will become available for selection again after 5 years and the Facelift project after 3 years.

Research and Development costs on the Profit and Loss Statement also include 50% of any investment in a new model (see the section on Production/New Models on page 11 ).

The selling price must be set, taking into account the designs and options chosen and the market sector at which the model is aimed. Careful consideration must be given to the pricing strategy as even a small movement in price can affect the ability to achieve sales.

Factories

· Factories are required to house the workforce and production lines

· The cost of a factory is given on the Cost & Data sheet

· The purchase of the first factory will be shown on the Cash Flow Statement at the end of year 1

· Each factory has the capacity for 4,000 workers (production and management employees) and unlimited amounts of automation

· New factories are automatically purchased if the workforce exceeds 4,000 or multiples thereof, e.g. if between 4,001 and 8,000 people are employed, two factories will be purchased

· If the number of employees falls to 4,000 or below, additional factories will automatically be sold

· If a factory is sold, it will realise 60% of its book value. The oldest factory is the first to be sold.

· Any number of cars may be produced in a factory

Car production

The number of each model built will depend on the workforce put on the model, productivity for the model size and investment in automation. Productivity is given as cars/worker/year :

City cars : 44

Medium cars : 42

Large cars : 41

Luxury cars : 9

Productivity can be improved by investing in automation and paying better wages.

Automation

· Automation can be introduced and purchased in units of £0.5m (rising annually with inflation)

· The minimum investment in is for one unit

· Each unit is as productive as eight workers, e.g. 4,000 workers + 1 unit of automation will give the equivalent of 4,008 workers

· Each unit of automation requires manning to be effective – one man per unit

· The automation purchased is distributed automatically across the models in production in the same proportions as the workforce.

· To keep the automation working at full capacity it must be properly maintained, which costs approximately 10% of the original investment per year

· Investment in automation & maintenance is optional and must be entered in the automation decision box

· Two models are produced in the first year and there are no upfront investment costs associated with these, just the production costs as specified by you.

· It is possible to launch one new model each year with financial investment.

· The investment must be made the year before production commences.

· Decisions relating to the new model are made during the following year/round of the simulation, e.g. invest in year 1, launch model/make decisions in year 2.

· The average investment needed for a new model is given on the Cost&Data Sheet (£325million in year) 1 but half to twice this figure is acceptable.

· The amount invested will have an impact on the degree of success of the new model.

· On the financial statements 50% of the investment will be shown on the P&L as R&D and 50% on the cash flow for production costs. The cash investment is then added to the assets on the Balance Sheet and depreciated by 10% annually.

· Once a decision has been made to launch a new model the project cannot be stopped but the launch can be delayed by allocating the minimum 100 workers to the model. The model specification will still have to be made as the workers will be producing a limited number of prototypes and pre-launch products for demonstration purposes.

Wages

· There is a minimum wage in force (£315 per week in year 1)

· The industry average wage is shown on the entry screen and the Cost&Data Sheet (£485 per week in year 1)

· Redundancy payment is 12 weeks salary.

Workforce

· The workforce may be moved from production of one model to another

· If employees are laid off, redundancy payments will have to be paid and bad industrial relations may develop

· It is not possible to reduce the workforce for any one model below 100

· A working year is 50 weeks

· An acceptable rate of absenteeism is 4 days per year

Promotion/Advertising

The Company and it products can be promoted/advertised via the media listed below.

Television Dealer Incentives

· Radio Promotional Offers

· Magazines/Newspapers Sponsorship

Digital Media

· It is important to choose the areas that will be most effective in relation to the target market.

Cost of Advertising

· There is an average cost for each method of advertising (see below).

· This average amount is the level of investment required to create enough product awareness to raise sales by a good margin.

· Investing less than the average will still have some effect within the marketplace and spending more will further increase customer awareness and sales.

There is a saturation point and investing more than twice the average amount will have a negligible or zero effectIt is important to choose the areas that will be most effective in relation to the target market.

General market research on promotion/advertising methods is given in Appendix VII (page 27).

Once the simulation has started it is possible to purchase research information on the market and also acquire data on the competition as follows.

Market Research

· Invest in general market research that is generated by the computer (£5m in year 1).

· The market research comprises market predictions, an investments sheet and expenditure by other teams.

Data on Competition

· Invest in detailed data on the competition (£10 m in year 1).

· The data on competition report provides details of all products in the marketplace, their pricing and sales performance and information relating to more general business and financial performance.

Funding

To support the funding of this enterprise, £500 million will be insufficient when the following costs are taken into consideration (see Cost & Data Sheet, Appendix IV).

· factory : £650 million

· automation : £500,000 per unit

· market research : £5 million

· data on competition : £10 million

· wages : minimum £315, average £485 per week

· raw material, design and options, research & development, costs.

Extra funding can be raised by a bank loan or by issuing new shares.

Bank Loan

To cover any cash shortfall, a standard loan is available from the bank. However, the bank will only lend up to a maximum of twice the current value of shareholder's funds. The amount available is shown on the finance decision screen within the simulation.

In the event of the cash balance at year-end being negative, an overdraft will automatically be granted but at a punitive rate of interest.

Interest on loans will be charged as follows :

negotiated loan : inflation + 5

overdraft : inflation + 8 (minimum 15%)

Share Issue

· It is possible to raise money from the stock market by issuing new shares - a maximum of 10% of the issued share capital in any one financial year.

· Shares can only be issued if the current share price is above the share face value of £100.

· A share issue is notified a year/round in advance, the success of the issue will depend upon the performance of the share price in the current year/round.

· The share price is dependent on three factors :

· the performance of the company

· the dividend paid

· the demand for the share.

· It is important to bear in mind that you need to obtain shareholder approval before seeking fresh equity investment.

Loan Repayment

· Loans can be repaid from positive cash balances as and when you wish to do so.

· An overdraft is paid off when the bank balance rises above zero. It should be noted that overdrafts are fully repayable on demand and are not considered to be a part of core business funding.

Investment

Bank Account

Interest rate on balances in credit : 1.5 + inflation

Gilts

It is possible to invest in gilts.

· Gilts must be held for five years/rounds, with a fixed rate of interest being paid over that period.

· At the end of the five years/rounds, the original investment value is repaid.

· The interest rate will depend upon the prevailing inflation rate in the year/round the gilts were issued. The figure is given on the News Bulletin report, it is calculated as :

Interest on gilts : 2.5 x inflation (minimum 6%)

Shares

· Shares in competitors can be purchased.

· Not more than 10% of the issued shares of any company can be bought in any one round, but as large a stake as required can be accumulated over a number of years/rounds.

· Shares must be bid for in multiples of 1000 by entering the maximum price you are prepared to pay for those shares.

· Shares purchased can be sold at a later time. Any proportion of the shares held may be sold by entering the minimum price you are prepared to accept for them.

· When buying or selling shares, the number bought or sold will depend upon the stock market demand for them and the price you are prepared to bid or accept.

Dividends

A dividend per share may be declared each year if the company is in profit, i.e. showing a positive retained profit. This may be calculated with reference to the profit projections provided by the whatif model, otherwise an estimate of post-tax profit should be calculated, a proportion allocated for distribution to shareholders and this figure divided by the number of shares issued to give the dividend per share. A dividend declared in one year will actually be paid until the next year; in the meantime it will become a liability.

Organisational Overheads

All organizations have overheads. Such expenses cover management costs and expenses, administration, communications, IT, HR, financial and legal management and all the other costs associated with the day to day running of a business. In the simulation, overheads are calculated using the following formula:

10% x wage bill +

  7½% x materials used +

  5% x opening book value of fixed assets

Tax

Corporation Tax is charged on profits at 22%, payable in the following financial year.

Payment Periods

You must set the number of days that you give customers to pay after an order has been placed and the number of days that you will wait before paying suppliers after purchasing materials.

· Giving customers a long credit period will appeal to buyers

· Delaying too long before paying your bills will cause suppliers to raise their prices

· The maximum period permitted for both parameters is 99 days

Assets

Fixed assets :

· Factories

· Automation

· 50% of any investment in a new model launch

· All will depreciate at 10% of their book value per annum

· Stock assets are valued at materials plus the amount spent on wages to produce the cars left in stock

· Stock will cost 15% of each car's production cost to keep them up to specification

Using the Executive simulation is extremely easy and we are extremely confident that once you have been able to access your team files a couple of times you will become very comfortable in its use. It is run online and contains a number of control features that make sure that your decisions remain within quite a wide range of parameters.

It is important to remember that the software is primarily a communication tool that enables you to submit your decisions for processing in an easy and efficient manner. The use of the simulation should not detract from the crucial strategy development and business planning that is key to the exercise.

Once the company's strategy and plan is in place, a set of decisions must be made. These decisions are then entered into the Executive user screens. The software contains a powerful "what-if" business-modelling tool that enables you to see the POTENTIAL impact of your decisions in a set of forecasted business results. Once decisions are entered, a predicted outcome can be viewed and the decisions can then be changed before finalizing them and submitting them for processing in the Master simulation where teams will compete interactively.

a. There are 5 worlds operating in the simulation and there are up to 9 unique teams in each world

b. In each world you will have your own secure simulation file

c. Your game files are unique to you and cannot be accessed by any other team provided you do not disclose your secure links/passwords to them.

Accessing the software and your team’s game file

The nominated member(s) of your team will receive an email containing a team number, a password and a link similar to :

http://executive.trainingsimulations.co.uk//PlayerLogin/index.php

Click on the link to run the simulation and enter the team password in the relevant box.

The first screen of the exercise will be displayed.

Opening Screen

From the opening screen, there are two main buttons for selection :

1. 'View Market Data', which enables you to view the Cost & Data Sheet for the current round. From round/year 2 this button will read 'Show Round X Results' and will enable you to view the results from the previous round and view the current Cost & Data Sheet.

At the beginning of any new decision-making period it is strongly recommended that the results from the previous year are analysed and used as the starting point for discussions and decisions relating to the current round/year. The new Cost & Data Sheet will also be needed as prices will have risen with inflation since the previous year.

The Reports and Cost & Data Sheet can be saved to a file or printed by using the icons on the top right hand side of the screen.

2. 'Go Straight to Decisions' to begin entering decisions immediately. This option is only likely to be used when re-entering the simulation after a break from decision making.

Other options on this screen :

5. At the bottom of the screen there is the option to view previous round results. From here you can view the results for any year/round.

6. There is also the option to exchange messages with the simulation administrators by using the message board.

Entering Decisions

1. To begin entering decisions select the Enter Decisions button, which can be found at the top and the bottom of the screen.

The decision-making screens relate to the form shown in Appendix V.

2. There is a generic help screen on each screen and beside each individual decision box there is a symbol that gives additional help on that specific element.

3. There is a main category decision box for each model and the company. These can be accessed directly at any time by using the menu bar on the left hand side of the screens.

4. Each category box has a Status button at the top right hand corner. This will be red and say pending until all decisions have been entered when it will change to green and say complete. It is not possible to proceed to the next stage of the simulation until all these boxes are categorized as complete.

5. Once all decisions have been entered select the green Proceed button at the bottom of the screen. You will then be able to view a set of projected results.

Viewing Projected Results

1. Executive will display a forecast set of results for the round and there is also a drop down menu giving the option to view any of the results from the previous round/year. The previous or projected results can be saved to a file or printed by selecting the appropriate icons.

NB : The predicted results are only a guide to what the possible outcome could be with that particular set of decisions, when processed in the Master simulation, the background competition, the decisions of the other teams/companies and environmental and economic factors will influence the actual outcome.

2. Once the projected results have been viewed it is possible to return to the main decision-making screens and change any of the data entered. To do this select the Change Decisions button at the bottom of the screen.

This can be repeated as many times as required, however, it is strongly recommended that changes made to decisions to try to improve performance are managed carefully. If too many changes are made at the same time it will not be possible to identify which one(s) have made an impact. It is best to make as few changes as possible each time the "what-if" model is run.

There may also be a charge for each time you return to the decision screen to make changes. The tutor will inform you of any charge before the decision period begins.

Saving Decisions

To save the decisions for submitting to be processed select the green Finalise Decisions button at the bottom of the screen. NB : Once this button has been selected it will NOT be possible to view or make any further changes to the decisions.

1. From year/round 2 onwards the button below will be displayed at the top left hand side of the opening screen. It will give access to the results from the previous year/round and the Cost and Data Sheet for the prevailing year/round.

2. At any time during an exercise the results from previous years/rounds can be viewed by selecting "view previous round results" at the bottom of the login page.

3. To print or save any report, display it on the screen and use the icons at the top right hand of the screen.

Executive Briefing and Guide

Page 18

CHIEF EXECUTIVE OFFICER

Purpose of Job

To deliver shareholder value and ensure compliance with accepted standards of corporate governance

Key Tasks

· Formulation of company strategy

· Presentation of Annual Report to shareholders and investors

· Recommendation of investment proposals and plans

· Effective management of the Executive Management Board

· Approval of company marketing and promotional programmes

· Approval of capital plans up to a maximum annual investment of 5% of annual turnover

· Ensure complete compliance with bank requirements and demands

Performance Indicators

· Delivery of increased shareholder value year on year

· Achievement of the annual profit and cash plan

· Timely presentation of the annual and city/investor report

· Annual reduction in the cost

· Achievement of gross margin target on all product lines

STRATEGIC PLANNING EXECUTIVE

Purpose of Job

To ensure that the company's strategic plan is developed and implemented to achieve the agreed business goals and objectives

Key Tasks

· Work with the CEO and other Executives to create the strategic plan for the company

· To monitor the activities of the firm’s marketplace and identify market and competitor trends

· To recommend changes to the strategic plan in the light of these trends

· To prepare an annual report for the CEO and the Non-Executive Board on the firm’s strategic achievements and capabilities

Performance Indicators

· Alignment of company activities to meet the needs of the strategic plan

· Delivery of Annual Report for CEO and Non Executive Board

· Achievement of end position to ensure the continued growth and development of the firm

MANUFACTURING EXECUTIVE

Purpose of Job

To deliver the annual production plan to budget and quality targets

Key Tasks

· Preparation of the annual manufacturing resource and output plan

· Development of the training skills plan

· Setting and managing the finished stock policy

· Preparation of capital plans for automation

Performance Indicators

· Achievement of optimum productivity performance indicators

· Stock levels in accordance with the annual/strategic plan

· Annual reduction in the cost of warranty claims

· Achievement of gross margin target on all product lines

FINANCE EXECUTIVE

Purpose of Job

To ensure that the company achieves its key financial performance indicators and stays within its borrowing limits

Key Tasks

· Preparation of the annual budget plan

· Presentation of the annual financial statement

· Evaluating capital plans and requests from manufacturing and engineering departments

· Compliance with established practices and protocols in corporate financial management

· Effectiveness of the IT and business planning systems

Performance Indicators

· Achievement of the annual financial plan

· Effective management of the cash and borrowings policy

· Timely presentation of the financial report to investors and the Board

· Financial capability of all Executive managers

TECHNICAL AND ENGINEERING EXECUTIVE

Purpose of Job

To ensure that all products and specified correctly and that new design ideas are introduced to manufacturing in accordance with best practice

Key Tasks

· Preparation of the technical specification for each vehicle product

· Assessment of new trends in vehicle engineering concepts

· Quality of supplied parts and components

· Clarity of understanding with manufacturing and marketing about new product introductions

Performance Indicators

· Engineering performance

· Technical excellence of product design and engineering

· Use of cross platform technology

· Annual reduction in the cost of warranty claims (in association with manufacturing)

· Value engineering, cost down projects

SALES AND DEALER NETWORK EXECUTIVE

Purpose of Job

To set and achieve the annual sales budget in both volumes and value of product sold

Key Tasks

· Preparation of the annual product sales plan

· Company sales pricing strategy and policy

· Development of the dealer network

· Setting and managing the finished stock policy (in association with the Manufacturing Manager

· Initiation of sales promotions and campaigns

Performance Indicators

· Delivery of sales targets

· Quality and effectiveness of sales promotion campaigns

· New product ideas

· Sales profit margins (price responsibility)

HUMAN RESOURCE EXECUTIVE

Purpose of Job

To establish, implement and manage the company's HR strategy and policy

Key Tasks

· Establishment of the HR policies

· Development of the annual training programme

· Setting of the annual wage rates for all grades

· Management of the company's redundancy and employee benefit schemes

· Represent company on Government HR Task Force (when required)

· Review of Executive performance

Performance Indicators

· Productivity performance

· Employee absence levels

· Effectiveness of training programmes

· Days lost through undue industrial unrest

· Effectiveness of Executive Board

MARKETING EXECUTIVE

Purpose of Job

To prepare and deliver the company's marketing and brand development strategy and plan

Key Tasks

· Preparation of the product marketing plans

· Formulation of the media and advertising strategy and plan

· Development of the brand strategy

· Gathering of market intelligence to inform the product development programme for existing and new products

Performance Indicators

· Delivery of the marketing plan to budget

· Protection of the brand image of the company

· News and Media PR responses

· Preparation of recommendations for upgrades of existing and new products introductions

A: Business Results

B: Key Financial Ratios

C: Commentaries

Select your KPIs from this list (or decide on some for yourselves!)

Financial Indicators

Bank Balance £

Return on Shareholders Funds %

Return on Capital Employed %

Return on Assets %

Gross Margin %

Sales Margin %

Current Ratio (to)

Gearing Ratio (to)

Liquidity Ratio (to)

Market Indicators

Sales Volumes pa

Sales Value pa

Market Share (total)

Market Share (per market sector)

Productivity Indicators

Output per Person pa (cars/employee pa)

Sales per Employee

Profit per Employee

Training £ per Employee

Days Lost to Strikes

1. Model Costs

2. Cost of Options

3. Cost of Designs

4. Cost of Research and Development (£m per annum)

5. Miscellaneous Costs/Information

Normal Absenteeism/Strike level (days/worker/year)

4.00

Company Name                                                          

(maximum 25 characters)

Automation (£m)                    Factory Output (%)                    

(maintenance + new) (e.g. 80% = 4 day week)

Wage (£/week)                     

Promotional Expenditure (£m)

Television                

Radio               

Magazines/Newspapers                

Digital Media                

Dealer Incentives               

Promotional Offers               

Sponsorship               

Decision Form continued

New Model Investment (£m)                         

Market Research : Yes / No*

Data on Competition : Yes / No*

Borrow £m                         

Payback £m                         

Issue thousand £100 shares at current market price

Declare dividend of £ per ordinary £100 share

Days for Customers to Pay (0-99) (Number of days given for customers to pay)

Days to Pay Suppliers (0-99) (Number of days waited before paying suppliers)

Invest £m              in five year, £100 Gilts

* Delete as applicable.

There are five projects that are guaranteed to succeed – they are shown in bold italics in the table above. All other projects carry a risk of failure.

A project is firstly researched by the company as a whole, and then if successful moves to the development stage and ultimately becomes online (or fails). For the project to continue the project box must be ticked on the decision screen – if at any time it is "unchecked" the project will be cancelled.

Once the project is online or has been successfully researched for one car model it is possible to carry out the development process for other models if required. To do this, tick the relevant box on the decision screen for the additional model(s) and the development stage will begin. This will then be charged for as per the Cost and Data Sheet until it becomes online or fails. The research stage will not have to be repeated.

The exception is for projects 1, 2 and 27. For these projects both the research and development stages must be undertaken for all models.

Once online, the Product Relaunch project will become available for selection again after 5 years and the Facelift project after 3 years.

The status of all projects and the year they are expected to come online is provided on the Research and Development Report in the Results drop down menu in the simulation.

Note : When a new model is launched, 50% of the investment cost will show as an R&D cost on the Profit and Loss Statement.

Methods of Promotion (Market Survey)

The Motor Industry is said to be the largest buyer of advertising in the world. Expenditure is high and therefore it is important that it is used effectively. The following information summarises April Training's findings on the effects of various forms of promotional advertising on the purchase decisions of a cross-section of car buyers.

Television is expensive but extremely effective and has the most noticeable overall effect throughout all age groups and all car markets. It has been proven that campaigns which include TV are 35% more effective than those without TV at delivering large business effects, and that TV is more effective now than it was 20 years ago. Furthermore, a 10-year analysis carried out by PWC found that on average, when considering over 700 brands in 7 markets, a £1m increase in TV investment yields a £4.5m increase in sales, the highest return on investment of any medium. The power of TV advertising is highlighted by the fact that for the first time ever, McClaren launched a pan-European TV campaign in 2016 to market its new sports car range.

For the purposes of the simulation, TV advertising includes TV in the home and the use of large screens at large sporting occasions or music arenas, e.g. football and rugby games. VW, Renault and Fiat are among 7 auto brands that have recently purchased advertising time at major football games in Italy – displaying the ads during the 15 minute break as well as before and after the game. Ford used the UEFA Champions League soccer final to launch a pan-European advertising campaign in summer 2013.

Local radio advertising is a fast, low-cost method of transmitting a message to a captive audience as listeners tend not to change radio stations in the way that viewers flick through TV channels and people often listen for hours at a time, remaining loyal to one station. It is thought to be particularly effective when targeted at the younger age group, however, specialist stations now cater for a wider age and social grouping range, which is increasingly allowing this medium to reach a very large audience. The audience size has also increased with the advent of digital radio, not only providing an improved service but also giving access via the internet, digital TV and mobile phones and approximately eight car manufacturers within the top 20 spend on radio advertising. Promotions and offers work particularly well with this form as advertising as radio often initiates a quick response. It has been a growth area in recent years but may be about to stabilize.

Magazines/Newspapers are effective for all car sectors but it is usually the over 30s that will take the time to read reviews. There is a risk element involved as a bad article can have a negative impact.

Digital Media (for the purposes of the simulation this includes internet, social media, tablet, Smart mobile phones, video and SMS advertising). It is the fastest growing form of media for advertising. It was initially aimed at younger buyers in higher income brackets but as use of the internet spreads so does its use by wider age and income groups; the increase in the percentage of "silver surfers" is particularly notable. Digital media advertising consists of paid search engines (e.g. google ads), banners and pop-ups on websites, displays and posting on social media and email sites, classified ads and audio and video streaming, for instance, Mercedes, Jaguar and BMW have made short advertising films, starring high profile actors/singers, for the internet, targeting first time luxury buyers. With the domination of Smart phones in the mobile phone market and the success of the tablet market, the access to websites and the use of social media has grown rapidly and with it the power of the internet, making it poised to become one of the largest forms of media for automotive advertising. It is interesting to note that in 2016, 79% of the spend on social media advertising targeted mobile users.

Research has also been carried out to identify the types of website that are visited by owners of each car brand. This information is intended to help car manufacturers target advertising on the most relevant sites as well as on their own websites, e.g. it emerged that Ford owners have a preference for travel and finance sites, while Vauxhall owners choose sites related to the automotive sector, such as Direct Line Insurance and Halfords. Internet review centres now also encompass the auto industry and are another tool to be used when customers decide which car they will purchase.

The use of SMS/texting is less significant but it does have a place in marketing budgets. In 2005 DaimerChrysler's SMART became the first manufacturer in the UK to use SMS responses to a TV advertisement, allowing viewers to arrange test drives, request brochures or locate dealers by sending a text message from their mobile phones. Land Rover followed shortly afterwards when it launched an electronic game called Range Rover Sport Tourer, available as a download from UK mobile phone networks.

Dealer incentives have a high cost, e.g. it is reported that, for a three-month period, VW offered its dealers €928 for each used car that was traded in for a new Golf V. However, this method of promotion can be very successful, particularly when targeted at the over 40s where the effect is marked. As well as giving sales staff the opportunity for increased personal gain it also provides them with the scope to offer customer discounts. This form of promotion is expensive but is very effective. The exception is the lower response in the luxury market.

Promotional Offers are very effective in all age groups, although less so for the over 55s. Historically, promotional offers were made late in a model's lifecycle to maintain sales levels. However, with increasing competitiveness in the marketplace, more companies are offering inducements from the outset, e.g. Vauxhall and Toyota are both 0% finance and 12 months free insurance (associated with taking out finance) on certain models, Peugeot is offering a 3 year finance package that includes insurance, road tax, servicing and roadside assistance and low cost leasing options are commonplace. End of year sales are also becoming popular to clear stock and boost profits.

Sponsorship will only be noticed by those interested in the events concerned. In the past this was usually restricted to motor sport events, being most effective when a major championship was won. Although this continues to be a major element in brand sponsorship, car manufacturers are now beginning to sponsor other events to widen the audience, e.g. TV and radio programmes; in the past few years, Audi has sponsored a major tennis tournament, Jaguar a tennis star, Mercedes-Benz a Giorgio Armani exhibition, Volkswagen has been a partner for the Berlin International Festival since 2003 and Fiat was the official Sponsor of European Rugby Cup in 2005, as well as launching an exclusive shoe collection in collaboration with a leading Italian shoe designer. Celebrity endorsement is also growing as a popular form of marketing.

However, sponsorship is also an area when companies feel they can save money in times when profits are under pressure, as an example, for budget reasons only, PSA pulled out of the World Rally Championship after 2005, despite having taken five Manufacturers titles and three Drivers titles in five consecutive years and Honda pulled out of F1 in 2009.

In conclusion, it is our opinion that manufacturers concentrating on the under 25 age group should consider television, promotional offers, digital media, radio advertising and to some extent sponsorship as the most cost-effective options, the 25-40 year olds should be targeted via television, digital media, promotional offers and, to a lesser extent, radio. Between the ages of 41-55, television advertising, dealer incentives, promotional offers and magazines/newspapers appear to be the most effect media and, finally, the older age groups (55+) respond best to television advertising, magazines/newspapers, dealer incentives and promotional offers.

Expenditure on Promotion

Advertising expenditure by the major motor manufacturing companies in the UK ranges from £200 to £1,000 per car sold, a total of £10-£100 million per year per company and in 2012 the total amount spent by European car manufacturers was 8.96bn Euros. In 2013 the leading companies spent between £21m and £47m advertising in the UK alone. Prestige marques such as BMW and Mercedes can spend less than the average, probably because their enviable reputations sell the products without advertising. The figures given include spending on direct mail, cinema and billboard marketing as well as the categories listed previously. Marketing budgets are usually based on a percentage of total sales revenue and can vary from 1-14%, with the majority spending between 3% and 5%. There does seem to be a correlation between sales and higher investment in promotion and those that spend more than 10% seem to reap the rewards.

Out of the total budget, most of the companies currently spend approximately 30-40% on television advertising. The second highest expenditure has traditionally been on promotional offers and dealer incentives, with Daewoo, Chrysler Jeep and Hyundai spend more of their budget on press coverage than TV. Magazines and newspapers also attract a big proportion of the budget. However, the big shift is towards investment in digital media marketing, particularly via social media, Smart phones and tablets. Over the last 3 years the budget split between traditional and online forms of advertising has moved from 95/5% to as much as 55/45% respectively (maximum figures). In 2014 expenditure on digital media advertising rose above 30% of the total budget in some cases and it is predicted that this could rise to 50% over the next few years. Currently, this is at the expense of investment in newspaper and magazine media but it is thought that it could also affect TV in the future.

In general, investment in advertising has shifted from traditional to more direct forms of promotion aimed at the customer, for example, discounts or added value options as free extras. In the current economic climate, investment in promotion is seen as key to improving sales in a market that is only just beginning to recover from economic crisis. Overall car manufacturers have increased their European marketing budgets year on year since the recession started in 2009 (the exception was in 2010 when the industry reduced spending by an average of 16%, with newspapers and television being the hardest hit areas), a pattern that is set to continue in the near future.

Effects of Promotion

The figures in the tables represent the effectiveness of each type of advertising for each category, ranging from 0 to 10.

2015/16 Page 26

Page 30

Production and Sales Report

Section 1: Model Production and Sales

Section 2: Model Resource and Cost Summary

Section 3: Productivity Report

Section 4: Market Distribution Analysis

Profit and Loss Account £ m

Overheads

*Cost of Sales Breakdown

Cash Flow £ m

Balance Sheet £ m

Fixed Assets

Current Assets

Current Liabilities

Capital and Reserves

Long Term Liabilities

Financial Indicators

Recent Industry News

Gilts are to be offered at 100% face value giving 5% interest per annum for 5 years. Economists predict that next year inflation will be around 3.7%.

Meetings between Ministers of the OPEC countries have been called to discuss falling overseas oil revenues and to debate crude oil price rises.

The European Motor Corp plc was forced to issue a factory recall on their S40 1.8ltr model due to an overheating fault in the cars electrical circuits.

Summary of Decisions Entered

Designs Available

Options Available

Research and Development Projects (Estimated year of completion)

Promotion Spend £m

Workforce, Wages and Automation Expenditure

Payment Periods

Page 42

Executive Briefing and Guide

START UP POSITION

Do we have to make an investment for setting up the first two models?

No. Only the cost of features you put on the car – designs, options, etc.

DESIGNS & OPTIONS

Can we put more than one design and engine on a car?

Yes. Different people will want different things from a car, it is up to the manufacturer to offer them a choice. For example, Mr X may want a hatchback with a diesel engine, Mrs Y an MPV with a diesel engine and Miss Z a hatchback with a petrol engine. All are made on the same basic car platform but if you only offer one design and one engine, only one of these potential customers will make a purchase.

For example :

Renault makes a Megane with the option of a petrol or diesel engine plus it offers the Scenic, which is an MPV version of the Megane, again offering both engine types.

How do we calculate the cost of the designs that will be added to a car?

Each car produced will have one shape/style and one engine.

For cost calculation purposes take the average of the cost of the shapes/styles offered and add the average of the cost of the engines offered.

Example : A medium car is being offered as a 3/5 door hatch and as an SUV/MPV. There is a choice of a small or a diesel engine.

The cost calculation in year 1 will be:

Shape : £780 + £1690 = £2470/number of shapes offered(2) = £1235 per car

Engine: £364 + £728 = £1092/number of engines offered (2) = £546 per car

Estimated cost of designs for the model = £1235 + £546 = £1781 per car produced.

How do we calculate the cost of the options for each car?

Buyers will choose the options they wish to add to the car from those that have been offered. Some customers may choose to add all of the options, some may choose none and some may choose a selection of those available. An average uptake is 33%. However, if the options offered are all appropriate for the type of car being sold and the target market then the uptake may be much higher. Conversely, if the options offered are not appropriate for the type of car sold and do not appeal to the target market then the uptake could be considerably less.

The actual uptake can be judged from the cost of the designs and options on the production report but it cannot be predicted in advance so for calculation purposes the figure of 33% of the total cost of the options offered should be used.

Why can some of the options that are included in the "packs" also be added individually?

Example : Park Assist can be offered as a single option or as part of the Driver Assist Safety Pack

They are offered individually and as part of a pack because some buyers may not want to buy the whole pack, just one element of it. However, the packs offer good value for money and encourage customers to spend more than if they were just going to choose one option.

RESEARCH & DEVELOPMENT

Once we have chosen to invest in an R&D project, do we have to tick the box again in subsequent years?

Yes, the project box must remain ticked until it is online if the project is to continue. If it is “unchecked” the project will be cancelled. Once online it does not matter if it is checked or not.

How is the R&D cost calculated?

Each research and development project has a research time and a development time that run consecutively. The development period only begins once the research period has been completed. The time taken for each phase is provided in Appendix VI. The cost of each project is given on the cost and data sheet. This cost will be charged each year until completion of the project. Note that the cost increases annually with inflation. If the project fails the charge will stop.

What does the term "online" mean when it appears on the R&D screen or on the R&D report?

On the R&D reports the term “online” means that the project has been successful and is now a feature of the model/car. The company will no longer be charged for R&D for this project.

How do you put a research and development project onto more than one model?

Research into a project need only be carried out once, it is a company investment rather than a model investment, even though it is selected on the R&D screen for a particular model. Once a project is online for one model or the research phase has been completed, it can be selected on the appropriate R&D screen for addition to the company’s other models. In this case, only the number of years for “Development” of the project will be needed until it becomes online for that model as well.

The exception to this rule are projects 1, 2 and 27 for which both the research and development times have to be carried out for all models.

Why is the charge for R&D on the Cash Flow Statement much higher than the total of the cost of the R&D projects selected?

The cost of R&D on the Cash Flow Statement includes 50% of any investment made in a new model.

DATA ON COMPETITION

Why is there an asterisk next to some of the sales figures?

The asterisk indicates that although the figure shown is the number of cars that have been sold, the company still has stock of the model.

PRODUCTION

Why is it saying that our production target cannot be met even though our calculations show that they should?

There are two possible reasons :

1. Productivity levels are lower than average because of unfavourable working conditions

2. You are trying to use too much automation – there has to be one worker for each unit of automation.

We invested £0.75m (for example) in automation but the Market Research document states that we have invested £1m – why?

If less than a whole figure is invested in automation, the figure will be rounded up to the next million on the Market Research report. However, the correct amount will show on the Cash Flow Statement.

We have invested in a new model in error can we reverse this?

No, once you have committed to a new model it has to stay as part of the company's plan as the money has already been invested. However, it can be put on hold by allocating just 100 workers to its production. You will still have to specify it with regard to designs and price.

KEY PERCEPTION FACTORS

What do the figures in the Key Perception Factor Report mean?

The Key Perception Factors are a weighting out of 10 that indicate the relevance of each design, option and research and development project to the image of a car. 1 indicates little relevance and 10 indicates maximum relevance. It is very important that you select designs, options and R&D projects that are in keeping with the type of vehicle you are trying to market.

Example : If you are selling a car that you are marketing as safe and green, you should give greatest consideration to options, designs and R&D projects that have a high score in the Safety and Green sectors.

SHARE TRADING

We have sold/bought shares but the transaction hasn't taken place – why?

If you were not allocated any shares that you tried to purchase then you probably didn't offer enough for them. It is a bid that you put in - not an actual purchase - it can be accepted or rejected. It could also be that other companies (teams) outbid you for the shares.

Likewise, if you tried to sell shares without any success then there were no buyers for them.

Do we have to make an investment for setting up the first two models?

No. Only the cost of features you put on the car – designs, options, etc.

Executive Briefing and Guide

NOTES

Use this page to make additional notes

36