Work-2

StratSimManagement The Strategic Management Simulation

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

Charlottesville, Virginia, USA

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Copyright Notice This manual and the simulation described in it are copyrighted with all rights reserved by Interpretive Software, Inc. Under the copyright laws, neither this manual nor the software may be copied, in whole or in part, without written consent of the authors, except in the normal use of the simulation for educational purposes, and then only by those with a valid license for use. The same proprietary and copyright notices must be affixed to any permitted copies as were affixed to the original. This exception does not allow copies to be made for others, whether or not sold. Under the law, copying includes translating into another language or format. Purchasing the simulation experience gives the owner the right to participate in a unique learning event. Each student or participant must purchase the simulation to take part in the event or the institution sponsoring the event must purchase for the entire group participating in the event. Limited Warranty on Media and Manuals In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or consequential damages resulting from any defect in the software or its documentation, even if advised of the possibility of such damages. In particular, the authors shall have no liability for any programs or data stored in or used with the computer products, including the cost of recovering such programs or data. This simulation experience is sold, "as is," and you, the purchaser, are assuming the entire risk as to its quality and performance. The warranty and remedies set forth above are exclusive and in lieu of all other, oral or written, express or implied. For more information about other products from Interpretive Software, please contact: Interpretive Simulations 1421 Sachem Place, Suite 2 Charlottesville, VA 22901 Phone: (434) 979-0245 Fax: (434) 979-2454 Website: http://www.interpretive.com Discover a Better Way to Learn. Active Learning through Business Simulations. Copyright © 1995–2021 Interpretive Software, Inc. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission of Interpretive Software, Inc. Cover image © BigStock. Incident images, audio, and video © iStockPhoto, GettyImages, and BigStock. Graphic images used in manuals © BigStock and iStockPhoto.

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Contents

Introduction 1 StratSimManagment Quick Start Guide 3 StratSimManagement Manual 4

StratSimManagement Case 5 Industry Overview 6 Vehicle Attributes 7 Vehicle Classes 8 Consumer Segments 10 Consumer Purchase Process 11 Firm Decisions 12 Company Reports 19 Industry Reports and Tools 21 Next Steps 22 Summary of Decisions 23 Product Class Examples 24 Segment Descriptions 29

Managing for Success in StratSim 31 Fundamentals of Strategy 33 The Profit Equation 36 Monitoring Performance and Pro-Forma 44 Long-Term Planning in StratSim 45 Timelines 45

Operations Guide 53 Simulation Navigation 54 Introduction 57 Company 57 Market 64 Competition 73 Tools 81 Decisions 88

Appendix 115 Glossary 116 Index 118

Print Date June 17, 2021

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Acknowledgements We have always considered our customers to be the most important part of our product development team, and we are fortunate that they put their time and effort into improving our products through their feedback and experiences. We will continue to incorporate suggested improvements into up-coming releases of this product, and welcome your comments and suggestions.

There are many people to thank for their assistance on this project and we would like to single out a few who significantly contributed to the content of this product over the years. In particular, Interpretive would like to thank Tom Kinnear from the University of Michigan, who provided a great deal of guidance and feedback with regard to original content of the project and later joined us as coauthor. In addition, the original B2B module design was derived in part from a customized project with Volkswagen, where we collaborated with James Thorne of Market Focus and Doug Dean of Volkswagen.

The most recent release of the browser-based version of StratSim was a team effort over several years and we especially would like to thank the development and support group at Interpretive: Clayton Shumate, Patrick Neeley, Anne Louque, Caleb Sancken, Matt Travis, Tim Sams, Andrew Roy, and Holly Miller.

Prior to this latest release, we have been fortunate to have many people provide feedback and advice to help StratSim get to where it is today. At Interpretive, Erin Simpson, Tony Naidu, Payton James-Amberg, Susan Christmas, Marjorie Adams, Gabriel Buddenbrock, Mary Deighan, Bill Luers, and Laura Simroth all contributed their talents and experience along the way. Faculty users have been the source of countless suggested improvements and StratSim is a significantly stronger product because of their thoughtful insights. In particular, we’d like to thank Paul Arsenault, Torsten Ringberg, Glenn Christensen, Christine Moorman, Marian Moore, Ron Wilcox, Paul Farris, Jeff Lefebvre, Larry Feick, Marty Roth, Robert Dooley, Marc Filion, Ujwal Kayande, Rick Leininger, Sam Certo, Sunil Gupta, Gerald Fryxell, and Juan Antonio Fernandez.

The section on Market-Based Management in the manual has benefited from interactions with many outstanding faculty colleagues at the Ross School of Business at the University of Michigan, and those participating in executive programs at General Electric, Kodak, CIM, and many more organizations. We especially want to recognize Gene Anderson, George Day, Chris Puto, Adrian Ryans, and Jim Taylor. This section has also been formed from discussions with literally thousands of senior corporate executive participating in executive education program over many years. We are grateful for the contributions they all have made to the development of this material.

Finally, we would be remiss if we failed to thank all the students and executives who have experienced StratSim in one form or another over the years. In particular, we appreciate the executives in programs at Volkswagen, Michigan EP, and McKinsey & Company. We’ve also been fortunate to have some extremely competitive and insightful students put StratSim through the wringer. The students in the Michigan EMBA, and Darden MBA and Executive programs are always extremely thorough in their analysis and some of their questions have led to improvements introduced in this version.

We look forward to hearing your comments and suggestions on our latest release and best wishes for a great experience with StratSimManagement.

Stu James Mike Deighan

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Introduction

STRATSIMMANAGEMENT

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StratSimManagement is an integrated strategy simulation game based on the automobile industry. Needless to say, much of the complexity of the industry has been simplified to allow participants to focus their time and energy on strategic issues. However, we've retained as much realism as possible to make it easier to quickly understand the overall environment.

StratSimManagement addresses the following issues:

• Developing a business definition and implementing a profitable long-term business strategy

• Identifying market opportunities and creating product offerings to satisfy them • Analyzing competitors and understanding their strategic intent • Developing the corporate infrastructure necessary to sustain growth • Allocating scarce resources among products, functions, and other investment alternatives • Exploring international market and sourcing opportunities (optional module)

In the simulation, you will be making decisions as part of a management team and competing directly against other teams. For up to 10 simulated years, you will make decisions in product research and development, vehicle pricing, advertising and promotion, distribution, manufacturing and finance. In addition, you may have to respond to issues raised by "incidents" (mini-cases), and complete supplemental assignments chosen by your instructor. By working together with your team in each of these areas, you will learn much about developing and executing a strategic plan.

You will need to understand your business in order to create a plan and make good decisions. Take 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 StratSim experience, we recommend the approach outlined on the following page.

StratSim gives you a “hands on” experience with strategy in a dynamic setting.

You compete against your peers in a StratSim industry for up to 10 simulated years.

As you make your decisions and evaluate results, you will gain experience with strategic management.

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StratSimManagment Quick Start Guide

PERIOD DECISIONS • Marketing decisions • Distribution decisions • Manufacturing decisions • R&D decisions • Finance decisions

SIM ADVANCES • Check Schedule for times • Complete Decisions BEFORE Deadline

SIMULATION ENDS • Evaluate team performance • Review what you have learned

STARTUP DECISION • Access simulation from course website • Watch introductory video • Enter first period decisions

READ THE CASE • Industry background • Company starting situation

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

DECISION ANALYSIS • Tools • Timeline • Pro-forma

EVALUATE RESULTS • Company reports • Environment • Competitive reports

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StratSimManagement Manual

The remainder of this manual is divided into sections described below. Understanding and success in StratSim will be greatly enhanced by reading this manual before you begin the simulation. The sections listed below will answer most of the questions students typically have during the simulation experience, and reading them has the added benefit of improving your competitiveness. Finally, the operations guide and StratSim case are also available on-line in the simulation software. Section 1: StratSim Case presents the StratSim industry in a form similar to a business school case. It also serves as an introduction to the situation when starting the simulation. Following the case are examples of the various product classes and segment descriptions. Section 2: Managing for Success provides a basic framework for how to create a strategy and introduces several approaches to keeping your company on track during the simulation. The section also provides a number of helpful hints on how to improve your performance. Section 3: StratSim Operations Guide provides guidance on how to use StratSim, including a detailed description of each menu option. Appendix: This section contains several appendices that provide you with information on how to export data to a spreadsheet, a glossary, and an index.

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StratSimManagement Case

STRATSIMMANAGEMENT

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Congratulations on your recent appointment to manage one of the firms in StratSim. Though your primary objective will of course be to learn, you will also be setting other goals and objectives for your firm. Those may be to become the market leader, or perhaps to maximize shareholder return, or possibly to generate the most net income over the course of the game. Selecting objectives is up to your instructor and your group. However, you will find that the firms who do best in StratSim have a market-oriented strategy and execute it better than their competitors. This is far easier to say than to achieve. That is the challenge faced by all marketing managers and executives. The case provides background information on the industry in which you will be competing. The data that appear in this case may not match your particular scenario. Be sure to use the reports in the simulation for exact numbers.

Industry Overview Your firm is one of five competitors in the StratSim environment. At the start of the simulation each firm is in a unique starting position, with three vehicles targeting different market segments. All revenues are generated through sales of cars and trucks to automobile dealers, who sell to consumers in the StratSim world. Additional revenues may be possible through business-to- business sales as the simulation progresses. Industry sales in the most recent year were 4.4 million units, and some growth is expected in the next year. An overview of the five firms and the vehicles they manufacture at the start of the simulation is provided in Exhibit 1.1 below. Note that the first letter of each vehicle matches the first letter of its manufacturer for easy identification. Exhibit 1.1: Company Overview

Firm Name Vehicles Sales

(000s units) Sales

(billions) Income

(billions) (A) Amazing Cars Alec, Alfa, Awesome, 1,278 $21.9 $1.3 (B) Best Motor Works Beaut, Boffo, Buzzy 374 $11.7 $1.2 (C) Cool Cars Cafav, Camini, Climax 482 $13.3 $1.2 (D) Driven Motor Co. Defy, Delite, Detonka 1,128 $20.0 $1.3 (E) Efficient Motors Efizz, Estruck, Euro 1,099 $21.3 $1.3

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Vehicle Attributes Vehicles have attributes that can be measured and compared. In StratSim, these include price, as well as size, performance, interior, styling, safety, and quality. Each attribute has a range of values based on what can feasibly be designed and built by a firm. The interior, styling, safety, and quality attributes (ISSQ) have a maximum value dependent upon the firm's technology capability in that area. Currently, the maximum values are somewhere between 3 and 8, depending on the firm and the attribute. Vehicles with higher attributes in these four dimensions are more appealing to customers, all other things being equal. Customers may find a particular attribute more important (i.e. consider it a "hot button"), depending on their needs and preferences. In evaluating vehicles, customers weigh the ISSQ attributes against the price of the product, while also considering the size and engine performance of the vehicle. Exhibit 1.2 summarizes vehicle attributes and the range of values associated with each. Exhibit 1.2: Vehicle Attribute Descriptions

The current vehicle attributes and manufacturer's suggested retail price (MSRP) are summarized in Exhibit 1.3, ordered by vehicle class.

Attribute Description Range of Values

Price Manufacturer’s Suggested Retail Price (MSRP). Actual (retail) selling price to customer will vary from MSRP.

Generally ranges from $10,000–

$50,000

Size Length and width of vehicle, which includes passenger and cargo space. Size is measured on a scale of 1–100.

1–100 (smallest to largest)

Performance Measured by engine horsepower (HP). 50–300 HP (low to high

performance)

Interior Comfort, visibility, instrumentation, music systems, ergonomics.

1 to maximum firm capability

Styling General curb appeal, styling, handling, finish / workmanship. 1 to maximum firm

capability

Safety Structural design, braking systems, safety features. 1 to maximum firm

capability

Quality Overall reliability, durability, consistency of products. 1 to maximum firm

capability

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Exhibit 1.3: Vehicle Attributes/Characteristics by Class and Name

CLASS NAME MSRP SIZE HORSEPOWER INTERIOR STYLING SAFETY QUALITY

Economy Alec $ 15,351 14 135 2 1 3 2 Delite $ 11,293 5 85 1 1 1 1

Family

Alfa $ 24,084 28 165 2 1 3 2 Boffo $ 35,003 49 200 4 3 2 2 Cafav $ 31,361 49 165 4 2 2 2 Defy $ 25,922 43 165 2 1 3 2 Efizz $ 18,869 35 140 1 1 2 1

Luxury Beaut $ 38,385 62 240 2 4 2 2 Climax $ 45,997 74 240 4 2 2 2

Minivan Camini $ 24,144 82 200 2 1 2 1 Sports Buzzy $ 34,652 54 190 3 3 2 3

Truck Detonka $ 19,572 66 185 1 1 1 1 Estruck $ 21,843 75 280 1 1 1 2

Utility Awesome $ 21,149 40 220 1 1 1 1 Euro $ 26,528 59 200 1 3 1 1

Vehicle Classes The industry has historically been broken into seven vehicle classes — Economy (E), Family (F), Luxury (L), Sports (S), Minivan (M), Truck (T), and Utility (U). However, one new class offers future potential if developed and marketed well – the AEV (A) vehicle, which is a new breakthrough in drive technology. Each of these classes represents a unique configuration that requires a significant expenditure in R&D to develop. Exhibit 1.4 provides a brief description of each class of vehicle, along with typical ranges for price, size, and engine at the beginning of the simulation. The product class examples following the case provide a detailed description of each vehicle class, along with a sample picture. See Exhibit 1.4 on the following page.

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Exhibit 1.4: Vehicle Classes

Vehicle Class

Description Expected

Price Typical

Size Typical Engine

Sales (000s units)

Vehicles (with share of

class)

Economy (E)

Small, basic car that is inexpensive to buy and operate.

Under $20,000

1–30 Under 150 hp

872 Alec (68%) Delite (32%)

Family (F)

Mid-sized car for reliable, safe transportation at a reasonable price.

$15,000 to $38,000

30–65 120–200

hp 1,457

Alfa (24%) Boffo (6%) Cafav (10%) Defy (33%) Efizz (27%)

Luxury (L)

High-end vehicle with top of the line features and performance.

Above $35,000

45–75 Over 150

hp 273

Beaut (53%) Climax (47%)

Sports (S)

Cars emphasizing performance and style. Size and price range widely, but all are fun to drive.

$14,000 to over $35,000

15–60 Over 150

hp 144 Buzzy (100%)

AEV (A)

Alternative-energy- drive vehicles use new drive technology that is energy efficient and low polluting.

Above $20,000

1–50 70–150

hp 0

No vehicles introduced.

Minivan (M)

Family-oriented vehicles with lots of passenger and storage room.

$18,000 to $35,000

50–100 120–240

hp 214 Camini (100%)

Utility (U) Classified as a truck, but more passenger room and style.

$17,000 to $40,000

30–90 Over 150

hp 710

Awesome (47%) Euro (53%)

Truck (T)

Traditionally working vehicles, trucks are finding broader appeal as second vehicles and alternatives to sport cars.

$15,000 to $35,000

30–90 Over 150

hp 690

Detonka (53%) Estruck (47%)

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Consumer Segments There are two broad approaches to analyzing the StratSim market — by vehicle class and consumer segment. Each approach offers advantages, and both should be considered. There are five consumer segments in StratSim, numbered 1 through 5. Some consumers have a strong preference for a particular vehicle class. For others, there are two or more vehicle classes that would meet their needs. However, it should be noted that if a consumer finds another vehicle class that provides a better solution to their needs and budget, they might purchase that other vehicle class instead. Exhibit 1.5 provides an overview of each consumer segment. More detailed descriptions are provided in the section following the case. Exhibit 1.5: Consumer Market Segments

Segment Description Sales (000s

Units)*

Preferred Vehicle Class**

(1) Value Seekers

Value seekers have basic transportation needs, using their vehicle for commuting or as an all- purpose vehicle. Quality and safety are important to these price sensitive buyers.

768 Economy and Truck

(2) Families

Families have somewhat basic transportation needs, but require flexible vehicles with both people and cargo-carrying capabilities. Safety and quality are most important to these fairly price sensitive buyers.

1,724 Economy, Family and Minivan

(3) Singles

The singles market is young, and tends to spend a fairly high percentage of disposable income on their vehicles. Singles look for vehicles that are fun to drive. Styling and performance are important to this segment.

865 Sports, Truck, and Utility

(4) High Income

This segment includes families, professionals, or retirees. With high disposable income, they are willing to spend more for extra features. Interior, styling, and safety are important attributes.

381 Family, Luxury, Sports and Minivan

(5) Enterprisers

Enterprisers see their vehicle as an extension of their business and personal aspirations. They use their vehicles for business and also to impress. Styling and performance are important.

621 Utility, Luxury and AEV

*NOTE: Segment unit sales shown are per firm at startup. Actual market size varies with number of firms, and will change over time based on underlying market conditions and competitive dynamics.

**NOTE: Vehicle classes are listed in order of preference within the segment.

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Promotion

Training/Support

Vehicle

Dealer Invoice

Vehicle

Selling Price

Advertising Promotion

MSRP

Manufacturer Dealer

The needs of some consumer segments are not being met by the current selection of vehicles on the market. Customers may be looking for a new vehicle class, such as an AEV, or a significantly different configuration of an existing vehicle class. Firms must evaluate consumer needs and competitors’ products to identify opportunities in the market. If a firm introduces a new vehicle that satisfies these unmet needs, it may stimulate demand in the marketplace.

Consumer Purchase Process What vehicle a consumer will ultimately purchase reflects a complex decision making process. Consumers typically start out looking for a specific kind of vehicle in the right price range, though they may consider a couple of different kinds of vehicles. For example, a family buyer might consider both a minivan and a family class sedan in the $25,000-$30,000 price range. When consumers find a vehicle of the right type, they will then take a close look at the attributes of the vehicle. Of course, the overall appeal of the vehicle is weighed against the price the customer will ultimately pay. This trade-off between price and appeal is what creates value in the mind of the buyer. Each consumer has different needs and also places a different importance on each need. Some attributes may be very important to the consumer ("hot buttons") while others are less important. In some cases, consumers may want more of an attribute, while in other cases, they may have a particular ideal in mind. Their decision will also be impacted by their knowledge of the vehicle (awareness), experience at the dealership (dealer rating, dealer coverage), and special promotional offers and activities. The diagram in exhibit 1.6 illustrates the consumer purchase process for cars and trucks in StratSim. Exhibit 1.6: Vehicle Purchase Process

Consumers

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Firm Decisions Each period firms must make a number of decisions in StratSim. Your team will need to allocate marketing expenditures for the corporation and products, maintain and grow your dealership network, and set the production schedule. In addition, you must decide what technologies to invest in, products to develop, whether to expand plant capacity, and ensure you have sufficient resources to accomplish your goals. This section describes in more detail each of the decision areas. Marketing In StratSim you will have to make marketing decisions for the corporation as a whole and for each product. To make your marketing effective, you must first identify the kind of company you want to be, then use advertising, promotion, and pricing decisions to project the appropriate corporate image and generate interest in your products. Corporate advertising budgets are set on a regional basis. These funds are spent on generating a corporate identity in support of the dealer network in the regions. A public relations budget is also set to support publicity events for the firm, corporate, and investor relations. Finally, direct marketing can be used to generate interest within a particular target segment. Product advertising plays an important role in establishing vehicle awareness and shaping consumers' perceptions of products. In the StratSim world, managers are responsible for setting an advertising budget and an advertising theme. The majority of the budget is spent on media buys, with the remainder on the creative input and theme. The theme emphasizes one of the primary characteristics of the vehicle—performance, interior, styling, safety, or quality. Product managers attempt to match the advertising theme with the "hot buttons" of their target customer. Promotional budgets are set at the product level and include special incentive programs and general promotional activities. The purpose of special incentive programs is to move product during slower periods of demand. Examples of incentives include consumer rebates, below market financing, and dealer-oriented sales incentives. Examples of general promotional activities include funds for brochures, advertising in support of incentive programs, mailings, trade shows, and motivational contests. Vehicle pricing and costing is complex and requires careful attention to detail. Depending on the context, price can have several meanings. The manufacturer sets the vehicle MSRP (Manufacturer's Suggested Retail Price). This is the price that is posted in the window of the vehicle, but is rarely the price that the customer actually pays. Average retail price is the average of all the actual prices that customers pay. This price includes dealer mark-ups, promotional discounts, haggling with the dealer, etc. The dealer invoice is what the dealer pays for the vehicle

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and is the monetary value your firm receives as revenues. Finally, the manufacturing cost for the vehicle is the cost associated with production of the vehicle. The dealer invoice less the unit cost is the per unit margin the manufacturer receives for each sale. Choosing the best marketing mix for a vehicle is a difficult task. Test markets allow marketers to try different combinations of price, advertising, and promotion to determine their effects on sales and profitability. In StratSim, test markets can be used with vehicles that have existing sales. A test market condition is created in a particular city where levels of price, advertising, and promotion are adjusted from your national levels and the change in the sales in that market is measured. By extrapolating this change to national levels, a marketing manager can make better judgments on how much to adjust the marketing mix variables for the coming year. Dealer Distribution While the purpose of advertising and promotion is to generate interest, create an image, and communicate information about the vehicle, it is the automobile dealership that actually makes the sale and provides follow-up services. In StratSim, each firm has a captive dealership distribution structure organized on a regional basis. Each period firms must decide how many dealerships to open or close in each region as well as allocate funds for training and support. You may grow or shrink your dealership network by up to 10% of the total dealers in a single period. Below is a table of the dealership network for each firm at the start of the simulation. Exhibit 1.7: Dealers by Region

Firm Number of Dealers

North South East West Total

A 120 120 120 120 480 B 65 75 65 75 280 C 80 95 85 90 350 D 70 100 110 120 400 E 100 130 70 80 380

The profitability and success of a dealership depends to a large extent on the popularity of the manufacturer's vehicles. However, the number of dealerships also plays a role. In StratSim, this is referred to as dealer coverage, the number of dealers divided by the number of sales territories in a region. Having too few dealerships can leave smaller cities and towns uncovered. On the other hand, if coverage in a region exceeds 100%, sales can be spread too thinly across dealerships and lead to overly competitive pricing within the region. Management often looks to the sales, gross profit per dealer, and coverage as indicators of the proper balance. Dealer ratings can also provide insight into the success of dealerships. A strong dealer gross is expected to translate into a successful dealership, but training, support, and service revenues all contribute as well.

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Manufacturing Having good products, effective marketing, and a strong dealership network are all essential to creating demand for your products, but you must also produce enough vehicles to meet demand. In the short term, managers have to decide how to use plant capacity to produce the best mix of vehicles. Longer term, the firm must increase capacity to produce new vehicles and adjust to changing demand for existing vehicles. Capacity for each firm is fixed for a given year. However, changes of up to 50% of your current capacity may be initiated at any time. The increase or decrease takes one year to take effect. Thus, if you build additional capacity this year, next year you will be able to set production levels based on the new plant capacity. It is important to coordinate capacity increases with the launch of new products. In StratSim, firms may choose to set production levels above capacity in the short-run by running extra shifts and paying overtime. An over-capacity charge will be incurred if capacity utilization is over 100%. If the international module is enabled, you have the ability to open a plant in one of the foreign regions and produce vehicles there when the capacity becomes available. Each region has associated costs and benefits. Added costs might include shipping and tariffs, while the benefit may be lower cost of production. Please note that all production for a particular vehicle must take place in one location—production cannot be split between plants in different regions. Production within the constraint of capacity is fairly flexible. Firms must decide on production volume for each product on the market. When the production level on a line is increased from the previous period, the capacity now associated with that product is upgraded and retooled. Retooling also occurs when current or new productive capacity is dedicated to a new product line. Lower plant maintenance costs are likely when the factory is updated. Firms may choose to use a flexible production option that increases or decreases production by up to 10% from the firm’s target production value, depending on demand. If production volume is insufficient for demand, consumers who are unable to purchase a vehicle at the end of the period postpone their purchase decision until the beginning of the next year, purchase an alternative brand, or buy a used vehicle. Inventory levels should be considered when deciding on production schedules for the coming year. Too little inventory can mean lost sales, and too much increases costs and puts downward pressure on dealer margins. A reasonable target for inventory is 30 to 60 days. If a product is being redesigned or discontinued, the current inventory will be sold in markets outside the StratSim simulation at 90% of cost, so it is especially important to manage inventory levels when upgrading a vehicle. The costs for building plant capacity or retooling investment are recorded as an asset on the plant and equipment line of the balance sheet. The plant assets are depreciated over ten years and the

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expense included in the cost of manufacturing products each period. Cumulative depreciation is shown below plant and equipment on the balance sheet. Research and Development Each firm in the StratSim world has technological capabilities that parallel the vehicle attributes of interior, styling, safety, and quality (ISSQ). To keep measurement relatively straightforward, these are rated from 1 to the current maximum (where 1 equals a poor rating on that attribute). All firms in the industry start with different initial technology ISSQ capabilities. Firms have the ability to expand their capabilities up to current industry technology limits through investments in technology capabilities. These investments provide two advantages—first, the ability to develop cars with enhanced features (e.g. higher ratings); and second, the lowering of costs to develop a similar set of characteristics. For example, a firm with technology ISSQ capabilities of 8/8/8/8 would be able to produce a 4/4/4/4 car at a lower unit cost than a firm with a technology profile of 6/6/6/6. The current technology profiles with the maximum limitations are displayed below. Exhibit 1.8: Technology Capabilities of Firms

Interior Styling Safety Quality Maximum: 9 11 9 11

( A ) Amazing Cars 5 5 4 6 ( B ) Best Motor Works 7 8 5 8 ( C ) Cool Cars 6 7 5 7 ( D ) Driven Motor Co. 4 5 5 6 ( E ) Efficient Motors 3 5 3 5

Note that having the capability to build a vehicle with certain attributes is not the same as actually doing it. So increasing the firm technology capabilities does not automatically increase the attributes of individual vehicles. To make changes to vehicles using the increased firm technology capabilities requires starting new development projects, either to upgrade existing vehicles or develop new ones. As is the case with the automobile industry, product development in StratSim is expensive, time consuming, and risky. However, the reward of having the leading vehicle within a product class is often well worth the investment, and falling behind other vehicles in terms of styling, performance, and appeal is dangerous. Additionally, new products are needed to take advantage of opportunities in the market. For every development project, there is also an overall cost for the development process, an estimated unit cost, and a time to complete. Each firm has a limited number of product development centers affecting its ability to work on multiple development projects (upgrades and new products) concurrently. You start with two centers. Funding new centers increases your ability to develop more products at the same time.

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This investment corresponds to hiring more product development engineers and expanding the R&D facilities, allowing your firm to work on more new vehicles or upgrades at the same time. Developing a new vehicle starts with a concept created by development engineers based on your specifications. You can create as many concepts as you want, and there is no cost until you decide to start development by moving the concept into one of the development centers. Concept testing is an important step in the new product development process. This is an opportunity for your firm to get early feedback on your potential product before the costly development cycle begins. Spending some time up front with customers can save a tremendous amount of resources down the road. New vehicles in a class in which you already have experience take two years to develop, while a new class takes three. Upgrades start with an existing vehicle, and make modifications to the platform to better suit customer needs. Changes can be made to the ISSQ characteristics as well as the size and horsepower. The modifications can be major or minor. Minor changes can be completed for the next period, while major changes are ready in two periods. When an upgraded vehicle is put into production, any existing inventory will be sold in markets outside the StratSim simulation at a loss. Thus while a minor upgrade can be deployed quickly, any inventory will be written off immediately. The extra period required for a major upgrade gives you time to get excess inventory under control before it is written off. All projects have an estimated unit cost based on 100,000 units of production ("base cost"), which depends on the vehicle class and attributes. If actual production is less than 100,000 units, actual unit costs will be higher than the estimate. If actual production is greater than projected, actual unit costs will be lower than estimated base cost. In general, unit costs decrease with greater production volumes due to the experience. You can also initiate a cost reduction upgrade to reduce the base cost of a vehicle. A cost reduction upgrade makes changes to the vehicle design and manufacturing process without affecting the attributes. An overview of the product development paths is illustrated in Exhibit 1.10 on the following page.

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Exhibit 1.9: Product Development Timelines

Current Period

Period + 1

Period + 2

Period + 3

Cost Reduction $100-$200 Million

in current year

Put in Dev. Center (no changes to specs

allowed)

IN MARKET Retooling.

Results impacted. (vehicle costs

reduced, no impact on sales)

Minor Upgrade $100-$300 Million

in current year

Put in Dev. Center Tweak Specs*

Adjust Marketing Mix Adjust Production

(Inventory disposed)

IN MARKET Results impacted. (Including sales,

retooling, inventory write-off)

Major Upgrade $250-$750 Million Spread over 2 Yrs.

Put in Dev. Center Modify Specs†

Build Add’l Capacity

Project in Dev. Center Tweak Specs*

Adjust Marketing Mix Adjust Production

(Inventory disposed)

IN MARKET Results impacted. (Including sales,

retooling, inventory write-off)

New Product (Existing class)

$250-$1,500 Mill. Spread over 2 Yrs.

Create Concept Put in Dev. Center

Name Product Build Add’l Capacity

Project in Dev. Center Tweak Specs*

Set Marketing Mix Set Production

IN MARKET Results impacted. (Including sales,

retooling)

New Product (New class)

$500-$2,500 Mill. Spread over 3 Yrs.

Create Concept Put in Dev. Center

Name Product

Project in Dev. Center Tweak Specs*

Build Add’l Capacity

Project in Dev. Center Tweak Specs*

Set Marketing Mix Set Production

IN MARKET Results impacted. (Including sales,

retooling)

* Max change for each of the interior, styling, safety, and quality attributes (ISSQ) is 1; HP is 5; and size is 2. † In the first period of a major upgrade, you’re allowed a max change of 2 for ISSQ, 20 for HP, and 10 for size. Importing/Exporting In addition to developing its own vehicles, a firm may choose to import to the domestic region from firms in the Atlantic and Pacific regions. In this situation there are no development costs, and vehicles are purchased at a fixed unit price. For example, Firm A might import a truck based on the Omni80, which is produced by Oceanic, a computer-run firm in the Pacific region. The product will be marketed under a new name, starting with “A”, such as Ant. Likewise, a firm may export vehicles to the Atlantic and Pacific regions. If a computer-run firm in an international region agrees to your pricing, it will buy a fixed number of units, turning around and selling the vehicles in its home country under its name.

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The Atlantic region is known for vehicles with excellent styling and features, while the Pacific region is known for lower materials and labor costs for production. Although these regions may bear some resemblance to actual regions, one should carefully analyze the vehicle information and not rely on perceived similarities with actual countries or regions. Importing a platform from another firm is something worth considering if a manufacturer lacks experience in a vehicle class or has limited technological or development capabilities. Importing may be a short-term measure until R&D is able to design a vehicle internally. Exporting is a way to increase sales, especially if you see a gap you can fill in an international market. A firm cannot have more than four active import and four active export agreements. Please note that importing and exporting are optional features that your instructor can choose to enable or disable. Financing Financial management in StratSim is essential. In addition to choosing among investments in technology, manufacturing, and product development, firms must also manage cash flow and investor expectations. A firm running low on cash has three options in StratSim: sell stock, issue bonds, or draw on a revolving line of credit. Selling stock has the benefit of not creating an interest expense or additional obligations. However, the drawback is dilution of the shares of stock that may lower the share price at the time of issuance. In StratSim, you specify the amount of capital to raise, and the appropriate number of shares will be sold at the current stock price in order to reach your goal. Stock sales are recorded at a par value of $1 per share, with any amount above that going to additional paid in capital on the balance sheet. The second option for raising capital is to sell 10-year bonds, callable after three years. The interest rate on the bonds will reflect current interest rates and the credit rating for the company. AAA rated bonds offer the lowest investment risk and therefore the lowest interest rate. The interest rate is fixed for the life of the bonds and interest is paid out automatically each period, with the principle coming due at maturity (after the simulation is over). When bonds are sold, the issue amount is added to long-term debt on the balance sheet. After three years, the bonds can be called. Only one bond issue can be called in a period, the entire issue must be paid off at once, and there is a one year interest penalty for calling the bonds. StratSim firms must maintain a minimum amount of cash on hand to sustain operations, about 1% of revenue. If there are not enough funds available, a loan is automatically issued from a revolving line of credit to make up the difference, adding to short-term debt on the balance sheet. The interest rate on the line of credit tends to be higher than the rate on bonds, and will

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vary with changes in the prime rate and company credit rating. Interest due each period is paid automatically, but it is up to the finance manager to schedule repayment of the principal. A firm with a surplus of cash has a number of options. In addition to investing the cash in expanding the company, it can be used to purchase a one-year certificate of deposit, retire debt, or distribute as a dividend to shareholders. If management thinks the firm’s stock is undervalued, it may also be possible to repurchase stock with the extra cash. If stock repurchase is permitted, the firm is limited to 20% of the current market value of the company.

Company Reports Financial statements allow you to track company results and make better decisions. Shareholders and lenders use a firm’s financial statements to evaluate its performance in setting a stock price and bond rating. In StratSim, firms have access to the income statement and balance sheet of all their competitors, allowing them to compare their own results against other firms in the industry. A summary of the financial condition of all the firms in the industry at the beginning of the simulation is provided in exhibit 1.10. Exhibit 1.10: Financial Summary

Firm A Firm B Firm C Firm D Firm E Val Mkt Share 24.8% 13.2% 15.1% 22.7% 24.1% Unit Share 29.3% 8.6% 11.1% 25.9% 25.2% Preference 19.3% 27.0% 20.3% 15.1% 18.3%

Sales $21,886 $11,675 $13,310 $20,041 $21,280 COGS $16,847 $7,738 $9,379 $14,926 $16,252 Marketing $378 $379 $376 $377 $384 R&D $1,029 $1,001 $820 $1,223 $1,182 G&A $897 $464 $528 $807 $790 Other $1,471 $869 $980 $1,408 $1,374 Income $1,264 $1,225 $1,228 $1,300 $1,299

Stock Price $48.87 $44.93 $46.17 $47.47 $48.09 Mkt Value $17,838 $10,783 $11,773 $15,902 $17,312 Total Debt $10,539 $3,489 $4,903 $9,444 $8,991

Note: Dollar amounts (except stock price) are in millions.

The Income Statement summarizes revenues and expenses for the company. Revenues in StratSim consist of vehicle sales to dealers and direct sales to businesses. All costs directly attributable to the production of the vehicles sold is shown under cost of goods sold (COGS). This includes both the variable cost of materials and labor, as well as the fixed costs of the plant. The Cost of Goods Sold detail shows how COGS is calculated. Subtracting COGS from revenue yields

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the gross margin on vehicles sold. Low gross margins are a sign that products are priced too low, or production costs are too high. Some expenses, such as marketing, research and development, and general administrative expense, are not directly attributable to production. Marketing expense includes corporate advertising, product advertising and promotion, and sales force expenses. Research and development shows the costs associated with product development and technology improvements. General and administrative expense includes overhead from sales and the dealership network. Dealership training and the cost of changes in the number of dealerships are the result of your decisions, but most G&A expenses are not under your direct control. Income from operations is calculated by subtracting these indirect expenses from gross margin. Income from operations is a good measure of the health of the company’s core business. If gross margin is healthy but operating profit is low, that may be due to ineffective marketing, heavy investment in R&D, or rapid expansion of the dealer network. Interest income and expense as well as extraordinary items are applied to operating income to calculate income before tax. A high interest expense relative to income from operations could be a sign that a firm is having trouble managing its debt. Finally, taxes are deducted, leaving net income. Net income, less any dividends paid, is added to retained earnings on the balance sheet each period. If net income is negative, retained earnings will be reduced. There is no provision for tax loss carry-forward in StratSim. The Balance Sheet provides a snapshot of the firm’s assets, liabilities, and equity. In StratSim, assets include cash, receivables, inventory, and plant and equipment less depreciation. The firm must always keep enough cash on hand to pay current expenses, about 1% of revenues. Cash does not earn interest, but investing in a one-year CD will make it more productive. Receivables are the unpaid invoices owed by dealers. Dealers who are struggling will be slower to pay, resulting in higher receivables as a percent of revenue. Rising inventory may indicate changes in demand or competitive environment, while inventory that is too low could be resulting in lost sales. Plant and equipment is the total investment in production facilities through expanded capacity and line retooling; depreciation on the balance sheet represents the cumulative plant depreciation expense shown on the income statement.

Liabilities consist of accounts payable, short-term debt and long-term debt. Accounts payable is the amount owed to suppliers and payroll taxes collected but not yet paid to the government. Short-term debt in StratSim is the balance on the revolving line of credit, while long-term debt is the total of bonds issued. Equity consists of the original value of stock at par, any additional paid in capital, and retained earnings. Stock is sold at $1 par value per share. Your firm's initial shares of stock outstanding were all sold at par value. If stock is issued at a higher price, then the amount over par is shown in a separate line item as additional paid in capital. Retained earnings show the cumulative net

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income from the income statement, less any dividends distributed. Dividends may not be distributed if you have negative retained earnings. The Income Statement and Balance Sheet provide an overview of the financial health of the company. Managers use them to identify potential problems in the business. Correcting problems will require taking a closer look at additional reports. The Cash Flow statement, along with the Product Contribution report are internal reports to help management make better decisions. The Cash Flow statement shows the sources and uses of the firm’s cash. The changes in the amount of cash in the firm are calculated based on income from operations adjusted for depreciation, inventory, payables, and receivables; investment activities such as capacity increases, plant retooling, and CD investments; and financing activities such as stock or bonds issued, changes in loan balance, or dividend payments. A healthy company will have positive cash flow generated by core operations, though a negative cash flow as a result of investment in the company could be a sign of future growth. The reports discussed so far give an overview of the results for the entire company. The Product Contribution report allows managers to identify which products are contributing toward the success of the company, and which products need improvement in development or marketing. When calculating product contribution, only revenues generated by the product and direct variable costs, along with product advertising and promotion are considered. The report is very helpful in prioritizing development projects and identifying the effectiveness of marketing for specific products.

Industry Reports and Tools

StratSim provides a number of reports with information on the market environment and the competition. Market reports include general news in the industry, market shares by vehicle, regional analysis, and sales by consumer segment. Competitive reports are available on the products in the market, technology capabilities of competitors, spending on marketing, dealer networks, manufacturing capacity and utilization, and a summary of the financial results for each firm. Analyzing data on the market, customers, and competitors will help managers make better decisions.

Important! Since everyone on your team is sharing the same decision set, when there are a limited number of studies that can be run, this total is for your ENTIRE team, not just you as an individual. So be sure to coordinate purchase of research studies. Once someone on your team purchases a study or tool, your entire team will have access to the results of that research.

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There are a number of tools available in StratSim to help you convert data into knowledge and to improve your ability to make good decisions. Some tools will help you with product design, others will help you with resource allocation, and others may offer competitive insights not available from public secondary sources. The exact tools that will be available to your team will depend on the configuration of your game. New tools may also be introduced as the game is advanced, so be aware of changes in availability. Most of these tools will cost money to use, just as ordering and designing market research studies would in the real world. So you should spend some time knowing when and where these tools will be of the most value to you.

Next Steps The task of the management team is to maintain long-term profitability in the context of an increasingly competitive and changing environment. Customer needs and tastes will evolve. Competitors will be battling for market share and entering new product classes. Technologies and cost structures for the firms will change over time. Every simulated year, each firm will perform a situation analysis, identify problems and opportunities, and generate alternative options for decisions. Finally, based on careful consideration, persuasive presentation of competing ideas, and probably some arm-twisting, your team will come to a consensus as to which set of decision is best and implement them. Once your firm has a thorough understanding of the StratSim world, one of the first tasks should be to define a strategy. A successful firm will likely have a strategy that is well thought out and executed. Creating a sound strategy is the most important process your firm will undertake because your strategy is the framework for all decision-making and firm organization. The strategy should be a long-term vision for your firm that every member of your team can reference when making decisions and analyzing data. Strategy is defining segments served and creating a sustainable competitive advantage. It is your road map. It is where and how your firm chooses to compete. It is essential. Enjoy your tenure as a management team in the StratSim world. It should be an exciting and challenging learning experience. Good luck and have fun!

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Summary of Decisions Each period your firm will need to make a large number of decisions. The table below provides a summary of these decisions to help you track them.

Decision Category Firm Decision Product Decision

Marketing

 Corporate Advertising • By Region • Themes

 Social Media  Direct Marketing

• Budget • Target Segments

 Pricing • MSRP • Dealer Discounts

 Advertising • Budget • Theme

 Promotion

Distribution  Dealer Openings / Closings

• By Region  Training and Support

 Distribute in Market

Manufacturing  Capacity Change  Schedule Production  Flexible Product On / Off

R&D

 Technology Investment • Interior • Styling • Safety • Quality

 New Development Center

 Vehicle Upgrade • Major • Minor • Cost Reduction

 New Vehicle • Create Concept • Move to Development

Finance

 Sell Stock  Issue Bonds  Borrow / Repay Loan  Purchase CD  Distribute Dividends

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Product Class Examples The following pages provide a sample picture of a vehicle in each product class in StratSim as well as a brief description of some of the features one can expect to find in each class. Please note that the specifications are approximate and meant as a general guide to distinguishing product classes. Economy

Economy vehicles typically are small, low priced cars with less powerful engines. Price in the early periods is under $20,000. Engine horsepower is likely to be under 150. Most economy vehicles will have a hatchback and sedan model option, and some may also offer a small wagon. An economy car can usually seat 4 adults, though probably not comfortably. A child may be able squeeze in the middle of the back seat in a pinch. Legroom and storage space are minimal. In StratSim, this corresponds to a size of approximately 1–30.

Features on an economy car are also likely to be basic in order to keep the costs down. Some consumers are willing to pay more for these features, but one should be careful not to provide too many, driving up costs and eroding profitability. It is difficult to make significant money in the economy segment, though production volumes are significant. Also, for many consumers, an economy vehicle is their first car purchase, and therefore is an important part of your vehicle line-up. Examples of economy vehicles are the Honda Civic, Nissan Sentra, Hyundai Elantra, Kia Forte,

Volkswagen Golf, Toyota Corolla, Toyota Yaris, Fiat Panda, Peugeot 208, and Renault Clio.

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Family Family vehicles are mid-sized, medium priced cars with mid-range engines. Price in the early periods is between $15,000–$38,000. Engine horsepower is likely to be 120–200. Most family vehicles will have several different model offerings, and most will have four doors. A family car can usually seat 5 adults, though those in the back seat may be a bit cramped. Legroom and storage space are reasonable. In StratSim, this corresponds to a size of approximately 30–65. Features on a family car are likely to focus on safety and flexible storage. Customers who are in search of a family vehicle want a reliable, safe means of transportation for their families at a reasonable cost. This vehicle is likely to be their primary mode of transportation and should hold up well under the normal wear and tear of everyday family life. Volumes for this class are significant, so it is important to create a vehicle with wide appeal. Price and promotional deals have a significant impact on buyers of these vehicles.

Examples of family vehicles are the Toyota Camry, Honda Accord, Nissan Altima, Nissan Sylphy,

Skoda Octavia, and Volkswagen Lavida. Luxury

Luxury vehicles are high priced cars with top of the line features and performance. Price is typically in excess of $35,000. Engine horsepower is likely to be over 150. Luxury vehicles come in a wide array of models including sedans, coupes, and even wagons. A luxury car can usually seat 5 adults comfortably. Legroom and storage space are ample. In StratSim, this corresponds to a size of approximately 45–70. Features on a luxury car are normally numerous. Interior, styling, safety, and quality are all likely to be quite high. Customers who are in search of a

luxury vehicle want the best and are willing to pay for it. Though volumes in this class are less, per vehicle profit margins are high. These vehicles are also often the "flagship" brand for the company and help create showroom traffic.

Examples of luxury vehicles include various vehicles manufactured by Lexus, BMW, Porsche,

Acura, Mercedes-Benz, and Audi.

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Sports Sports vehicles emphasize performance and come in a range of prices and sizes. Typically they appeal to the young and the young at heart. An economy sports car might be priced as low as $14,000, whereas a high-end sports car may well be in excess of $35,000. Engine horsepower is likely to be over 150. Sports cars normally are coupes or hatchbacks. Some sports cars have only two front seats while others may have small back seats for additional cramped seating. Legroom in the front is reasonable, but there is typically little storage space. In StratSim, this corresponds to a size of approximately 15–60. Features on sports cars usually are related to styling and performance. Customers who are in search of a sports car want to be noticed and are willing to spend a good chunk of their disposable income to that end. Though volumes in this class are less, per vehicle profit margins are pretty good. These vehicles are also often high awareness brands for the company and help create showroom traffic. Examples of sports cars are the Ford Mustang, Dodge Challenger, Chevy Camaro, Chevy Corvette,

Hyundai Veloster, and Porsche 911. Alternative Energy Vehicle (AEV)

Alternative Energy Vehicles (AEVs) have more to do with the technology used to power the vehicle than the style and size of the vehicle. AEVs encompass a wide range of technologies that might be used to power the vehicle including electricity only (rechargeable batteries), fuel cell, hydrogen, solar, or some combination of these. Though the technology is more expensive and somewhat untested, it does lead to significantly improved energy efficiency and lower pollution. Power and/or range still remain a challenge. Expected prices are from $20,000 and up. Engine horsepower is likely to be 70–150, and size in StratSim ranges from 0–50 depending upon the application.

Examples of AEVs are the Tesla 3, Tesla Y, Wuling HongGuang Mini EV, Chevy Bolt, Nissan Leaf, Renault Zoe, and Hyundai Kona.

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Minivan Minivans are family oriented vehicles that have lots of passenger and storage room, but drive more like a car than a truck. These are perfect for families who need more space than a family vehicle can offer. Price is typically between $18,000–$35,000. Engine horsepower is likely to be 120-240. Most minivans will have several different model offerings, which mainly vary seating capacity and cargo area. A minivan can usually seat 7 adults, possibly more depending on the seating configuration. Legroom and storage space are excellent. In StratSim, this corresponds to a size of approximately 50–100. Like family vehicles, features on a minivan are likely to focus on safety and flexible storage. Customers who are in search of a family vehicle want a reliable, safe means of transportation for their families at a reasonable cost. This vehicle is likely to be their primary mode of transportation and should hold up well under the normal wear and tear of everyday family life. Price and promotional deals have a significant impact on buyers of these vehicles.

Examples of minivans include the Dodge Grand Caravan, Chrysler Pacifica, Honda Odyssey, Toyota Sienna, and Wuling Hongguang.

Utility Combine the attributes of a truck, minivan, and sports car, and you get a utility vehicle. Utility vehicles offer a little bit of fun and utility for those who need more passenger room than a truck, but don’t want to have the minivan "family" image. Price starts at around $17,000 for small utility vehicles, but fully loaded large ones will sell for over $40,000. Engine horsepower is likely to exceed 150. Legroom and storage space are excellent on larger models, which can also seat 5 adults. In StratSim, sizes of utility vehicles range from 30–90.

Features on utility vehicles usually are related to styling and performance. Many of the high-end models come with leather seats and other amenities normally found in luxury cars. Most customers prefer the 4-wheel drive models.

Examples of utility vehicles include the Toyota RAV4, Honda CR-V, Nissan Rogue, Ford Explorer, Ford Escape, Jeep Cherokee, Jeep Wrangler, Chevy Equinox, Subaru Forester, Subaru Outback,

Peugeot 2008, and Haval H6.

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Truck At one time, trucks were reserved for farmers and handymen, but no more. Truck sales have taken off in recent years thanks to their broadening appeal as an alternative to sports cars and a great second vehicle. Truck prices start at around $12,000 for small ones, but fully loaded larger trucks will sell for $25,000 or more. Engine horsepower also has a wide range depending on the size of the truck. Leg and headroom is ample, and most trucks seat 2 or 3, though some new models are adding back seats. In StratSim, sizes of trucks correspond to a range of approximately 30– 90. Features on trucks usually relate to styling and performance. Four-wheel drive models are very popular as well. Truck buyers are quite brand-loyal.

Examples of trucks include the Ford F-Series, Chevy Silverado, Ram Pickup, and Toyota Tacoma.

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Segment Descriptions The following pages provide a brief description of the five consumer segments in StratSim.

Value Seekers (1) Value Seekers have basic transportation needs. They use their vehicle to commute to work, or perhaps as a basic all-purpose vehicle. However, they don't have as much disposable income as other segments and are, therefore, more price sensitive. Quality and safety are especially important to these buyers. Vehicle classes that may be of particular interest to value seekers include economy and truck. Families (2) Families have flexible, but somewhat basic transportation needs. They need a combination of people and cargo-carrying capabilities with perhaps a bit of family fun built in. However, they don't have as much disposable income as other segments and are, therefore, somewhat price sensitive. Safety and quality are especially important to these buyers. Vehicle classes that may be of particular interest to families include family, economy, and minivan. Singles (3) The singles market is young, with more disposable income to spend on transportation and a wide variety of transportation needs. Styling and performance are most important to this segment. Vehicle classes that may be of particular interest to singles include sports and truck. High Income (4) People with high incomes have more elaborate transportation needs. This segment may be families, professionals, or retirees. They see their vehicle as an indication of their success in life. Since they have more disposable income to spend on transportation, they are likely to purchase vehicles with extra features and good performance. Vehicle classes that may be of particular interest to the high-income segment include family and luxury. Enterprisers (5) Enterprisers see their vehicle as an extension of their business and personal aspirations. Enterprisers use their vehicles for business transportation and also to impress potential clients. Their vehicles may be company or privately-owned. Careers such as real estate, investments, and sales are likely to fall in this category. Vehicle classes that may be of particular interest to enterprisers are luxury/sports utility, and other high-end vehicles, depending on their business needs.

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Managing for Success in StratSim

STRATSIMMANAGEMENT

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StratSim is designed to be a challenging and realistic learning experience. We hope that you will enjoy the challenge. The idea behind a simulation is that by striving to improve your performance in an active way, you will better understand how to operate a business. This section of the manual will provide you with insights that will help your StratSim team manage a successful business while making decisions based on ambiguous information in a dynamic environment. The first goal of StratSim is to allow you to develop, implement, and potentially adjust a strategy in a dynamic environment over multiple years. What exactly does "dynamic environment" mean in the context of business? It means that we can expect customers, competition, and macro- economic conditions to change as time progresses. A good strategy must reflect current realities while also assessing future paths to success in an ever-changing world. The second goal of the simulation is to give you experience in strategic planning and making decisions in an ambiguous environment. You will be leaving behind the comfort of structured exercises and entering a situation where the road to success is not so clearly defined. Although a company’s strategy is planned and implemented based on knowledge of the current situation, a strategy is also based on certain assessments and judgments about the future. Furthermore, decisions in StratSim are interrelated. Decisions should not be based solely on how one decision in isolation will impact an outcome, but also take into consideration the context of your other decisions as well as those of your competitors. How these decisions will interact is difficult to predict. Remember as the simulation progresses that even if you do not "win" in the simulation, gaining the experience of wrestling with these difficult decisions in an ambiguous environment is an important part of the learning process. In fact, many participants of the simulation will say that their greatest learning occurred when challenges were the greatest. The third goal of StratSim is to give you experience in making decisions as a group where your teammates will likely have different opinions about what your company should do. If this is your first time experiencing a group decision-making process, it requires new skills in addition to knowledge and judgment that focus on group and managerial processes. How will you organize your group? How will you make decisions? Consensus? Delegation? Can you come to a shared vision and mission for your company? Will you embrace your strategy or will you second guess others if faced with obstacles? Managing people and organizations is indeed a challenge. Your team should develop a written "charter" that describes the operating process that the team will use to do analysis, divide labor, and make decisions. Use StratSim as an opportunity to gain experience in this group process. Before we jump into analysis for success in StratSim, let’s begin with a quick review of the fundamentals of strategy, because a team with a well-reasoned strategy has a better chance of succeeding than a team without one. Then we will discuss some points regarding execution of strategy in the context of StratSim. These include measures that provide strategic insights and helpful tips that should improve performance.

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Fundamentals of Strategy A successful strategy is based on two foundations. First is a good understanding of the business situation, achieved from thorough internal and external analyses. Internal analysis is focused on knowing the capabilities and resources of your organization. External analysis focuses on the environment where your company chooses to do business. This will include both industry level considerations (markets, channels, competition, suppliers, etc.) as well as macro considerations (political, economic, socio-cultural, technological, environmental, and legal—sometimes referred to as PESTEL). The goal here is to understand the forces at work that impact your company. One framework that is often used to organize internal and external insights is SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). The second foundation of a strategy is the formulation of a shared mission and vision that the leadership sets for the company. This defines where and how it chooses to do business and also provides the directive for setting corporate goals and objectives, and the measures that should be used to evaluate performance and acceptable outcomes. Mission and vision are also the primary drivers of corporate culture and organizational structure, and must be chosen with key stakeholders in mind. Stakeholders are the people and organizations that stand to gain or lose something based on the success of the organization. Typical stakeholders include owners, employees, customers, partners, and suppliers.

Internal and External Analysis

Strategy Shared Vision and Mission

In their 2001 article from the Academy of Management Executive, “Are you sure you have a strategy?” Donald Hambrick and James Fredrickson provide an excellent framework that defines five necessary elements of a strategy. The authors propose that an organization defines its strategy by answering five questions:

• Arenas: Where will we be active? • Vehicles: How will we get there? • Differentiators: How will we win in the marketplace? • Staging: What will be our speed and sequence of moves? • Economic Logic: How will we obtain our returns?

These questions must be answered in the context of your internal and external analysis and your organization’s vision and mission. Remember to be specific when addressing these questions. Establishing well-defined and agreed upon directives will improve your group’s decision-making process in StratSim, just as having a clearly articulated strategy improves the likelihood of an

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organization’s strategy being executed successfully. In the following graphic, these five questions are expanded and applied to StratSim to help guide your team’s strategic planning process.

The Elements of Strategy Applied to StratSim

The above provides only a brief overview into the process of designing a successful strategy. Your instructor will likely provide additional resources for you to learn more about strategic planning. To summarize, make sure your team has the following:

• A good grasp of the business situation through internal and external analysis • An agreed upon vision and mission for your company • An established process for group analysis and decision-making

Regardless of the framework used, the objective of strategy is to leverage a firm’s capabilities and resources in the context of the external environment to create a sustainable competitive advantage over both the short- and long-term. The remainder of this chapter will be devoted to helping you improve your performance in StratSim. Importance of Strategic Assessment and Judgment The quality of strategic analysis is an essential part of success in StratSim. Be sure to take the time and effort to fully understand the industry and your firm’s position within that industry. An example where a team’s strategy could move in a non-optimal direction would be where your analysis of the industry causes you to believe that your firm is a high-end provider of vehicles when, in fact, your firm is more of a volume producer. That is different than saying that "although

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our company is currently positioned as a volume producer, we want to reposition ourselves as a high-end provider". This latter statement at least acknowledges the strategic challenge. Then the question becomes, how does the company reposition itself and is it viable to do so. A second example might be concluding that your firm enjoys a cost advantage over its rivals, when, in fact, the company does not have a true cost advantage where it can produce the same product at a lower cost. Instead, it has low per unit costs due to poor product specifications (e.g. the design has poor ISSQ—Interior, Styling, Safety, and Quality). In both of these examples, the decisions your firm will make will reflect these underlying strategic assessments, which, in the above examples, were not accurate. Poor assessment will often lead to poor performance. So, it is worthwhile to take the time to question important assessments to make sure your strategy is based on accurate information. Another area to consider is the definition of competitive arena—both how the arena is defined and where a company chooses to compete. There are several different ways to define the competitive arena. Should it be vehicle class (e.g. utility, minivan)? Consumer Segment (e.g. singles, families)? Microsegment (e.g. value seekers buying trucks, utility vehicles for enterprisers)? Region (e.g. North, South)? Each approach has its merits, but focusing on one arena definition alone may lead to an incomplete analysis. For example, one can leverage experience in a vehicle class as it is less expensive and faster to develop another vehicle of the same class than invest in an entirely new class of vehicle. But that may lead to cannibalization of the current product line. A second example might be pursuing opportunities in the truck class, without having thought through how the alignment of dealerships in particular regions factors into your ultimate success. These are examples of how arena definition needs to support one’s strategic assessments. In terms of choice of arena, consider two companies—one which focuses on low-end economical vehicles, and another that has been making high-end luxury and sports cars. Which do you think would be more successful launching a high-end sports utility vehicle for $50,000? Would customers wonder if the low-end company is capable of designing this vehicle? Is this potential customer also looking for an element of the prestige associated with owning a particular brand of vehicle? Remember that your company will have a perceived positioning in the marketplace which should be taken into account when considering alternative strategic options. So, when you move into new market spaces, remember that it may take more time and money to gain success in areas that are far from your core experience. It can be done but requires resources and patience. Performance Success and Shortfalls Most of the sources of poor financial performance fall into one of three areas: 1) not having enough sales to sustain the on-going costs of running the business; 2) failing to understand the financial structure of your company (e.g. too high product or fixed costs); and 3) failure to have a long-term plan that takes into consideration the proper staging of actions and investments. The remainder of this section will help you identify and diagnose sources of common performance successes and shortfalls.

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The Profit Equation Because long-term profitability is one of the measures of financial performance for your company, you should understand the drivers of profit. As the graphic below shows, unit sales multiplied by unit margin less fixed costs equals your company’s profit. Put another way, if your unit sales multiplied by your unit margin does not cover your fixed costs, your profit will be negative. So, generally you will find that if your profit is negative, your unit sales are low, your margin is low, or your fixed costs are high relative to industry standards. This should be straight forward to business students, but easy to forget as the dynamics of your industry play out.

Unit Sales x Unit Margin – FC = PROFIT

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC = PROFIT We can further define unit sales as market size multiplied by a company’s share of the market. We can also further define unit margin as the selling price less the cost of goods sold (COGS). We will refer to this formula as the profit equation. Therefore, poor profit performance is caused by some combination of low overall demand, low share, poor margins (the difference between selling price and COGS), or high fixed costs. Let’s look at each of these factors in more detail for potential causes of performance successes or shortfalls. Unit Sales: Market Size What are some of the factors that influence overall (or segment or microsegment) market size? Three are presented in graphic below—base or intrinsic demand, current economic conditions, and the competitor dynamics within the industry.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable

Cost) – FC

Base Demand

Economic Cycles Industry Dynamics

Let’s consider some examples of each of these factors. Base demand depends on long-term trends in population, the environment, or customer preferences. Separate from intrinsic trends would be the impact of the economic environment on demand. The automobile industry historically has been extremely cyclical. During recessions, new auto sales almost always slump as people put off purchasing new vehicles if they are not immediately needed. Also, rising (or

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declining) gas prices can negatively (or positively) impact the overall demand for vehicles and cause a shift in the demand of specific customer groups or for specific vehicle classes. So, one must consider how changes in the economy and gas prices will impact demand. Finally, how all the firms compete in particular markets also has an impact on overall demand (or demand within a segment). If all the firms innovate, advertise, expand distribution, etc., this will generally stimulate demand overall. Industries where there is less investment in these areas will grow less, all other things remaining equal. So how do changes in demand impact profitability? In general, the more a company’s costs are fixed rather than variable, the more dramatic the impact on profitability will be when demand falls (or rises). As an example, for a firm with $100M of revenues, if variable costs are running at 60% of revenues ($60M) and fixed costs constitute 30% of revenues ($30M), profit will be 10% of revenues ($10M). If demand falls by 10% resulting in revenues of $90M, the firm’s profits will decline to 6% of revenues ($6M or $90-$54-$30). This represents a 40% decline in profit or four times the magnitude of the sales decline. Had all costs had been fixed ($90M), there would have been no profit with a 10% sales decline. Generally, if overall demand is down, all firms will see their profits fall, but weaker firms (firms without a cost or differentiation advantage) will be hurt the most as their gross margins are typically smaller. Unit Sales: Market Share If the size of the market is stable but your share of the market declines, a corresponding drop will be seen in unit sales. After recognizing that your market share has dropped, analyze changes in share at the vehicle class or segment level to find the root cause. What caused the drop in market share in the family class or sales in the high income segment? Was it a new product launch by a competitor? Did a competitor upgrade a product? Was it due to a change in the marketing mix by either your firm or one of your competitors—pricing, advertising, or promotion? Was it due to insufficient production or perhaps a competitor finally increasing their production to meet demand? If you see that all of your vehicles are losing market share, perhaps the cause was more at the corporate level, due to distribution or firm preference. Usually problems in these areas will impact all your product lines more or less equally.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC

Base Demand Product Fit Economic Cycles Competition Industry Dynamics Price Relative Spending Quality of Spending Service / Distrib. Preference

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All of these issues are drivers of your market share. What makes it difficult to diagnose is that there are normally changes in all of these factors each year, which can lead to very reactive decision-making. Your firm’s strategy is what provides you with the long-term direction as to how best to alter your tactics as the game progresses. Which target markets should receive our limited resources? Do our products meet our target customer needs? Which competitors do we need to understand and monitor most closely? What will be the most effective methods (levers) to use to drive market share? Utilization of tools to help you better understand the customer and competition, such as the "test market", "focus group" and others, is critical for success. Unit Sales: Forecasting Sales for a Product Now that we have discussed the drivers of market size and market share, it is a good time to consider how one might forecast unit sales. Why is this important? In StratSim, you will be asked to enter a production plan for each vehicle. Though this can be adjusted by up to 10% each year by selecting the flexible production option, it is important for your production decision to be as accurate as possible to avoid either stockouts, where there is insufficient production to satisfy demand, or having unsold inventory, where production plus existing inventory exceeds demand. A stockout will result in lost sales and presumably, lost contribution. Unsold inventory ties up cash and runs the risk of becoming obsolete resulting in an inventory write-off if the product is upgraded or discontinued. Avoiding these conditions should be one of your company’s goals. Of course, the production level for a vehicle should take into consideration the current level of inventory available for sales of that brand. Because the production plan should be based on next period’s expected sales adjusted for inventory, the key to making an accurate production decision is having a good estimate of sales for next year. This is not a trivial process and the techniques one would use in StratSim are different for an existing product than for a new product. For both situations, however, the drivers of the Market Size x Market Share part of the profit equation are the basis for the forecast. What varies is the level of uncertainty and the tools one would use. Forecasting the sales of a new vehicle class requires using a combination of information about the vehicle class and consumer segments. The first step is to identify the market segment in which the new vehicle will be competing. Next estimate the number of consumers in the segment that have a preference for the vehicle class, and project the share of those consumers the firm can expect to sell to with the new vehicle. Take as an example a firm developing a sports vehicle for the singles market. The class preferences for the segment include utility, truck, and sports vehicles (in that order). Based on this information, they might estimate that 25% of those consumers would prefer a sports vehicle. Further, they project that 50% of those consumers will buy their new sports car based on the results of their concept tests and the fact that no other manufacturer is selling a vehicle in the class. If the size of the singles market is 1000 thousand units, then the sales forecast would be:

sales forecast = 1000 thousand x 25% x 50% = 125 thousand units

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For an existing product, there is the big advantage of knowing current sales as a base to start the process. For purposes of this example, let us state that the product had achieved sales of 100,000 units. The first question to ask is whether or not there were any special circumstances regarding production levels that impacted these sales. For example, was there a stockout situation either for this product or one of its direct competitors? Check the manufacturing detail for your company and the competitors to find this information. Read the message (some shortages: <10%, significant shortages: 10%-30%, or extreme shortages: >30%) to get an idea of the magnitude of the production shortfall. If, for example, you saw a message that stated "significant shortages", you may want to adjust your base to 120,000 units as an estimate of what you would have sold had you produced sufficient volume to meet demand. In the same way, if a direct competitor’s sales were affected by insufficient production, you may want to adjust your base downward. The potential impact of upgrades must also be taken into account. Conjoint analysis and concept tests may be helpful analysis to estimate the potential increase in market share. These analyses do not take into account any potential competitive product upgrades, however. Remember, as well, that with a major or minor upgrade, any existing inventory will be liquidated. Next, consider what decisions you are planning for the marketing mix. The potential impact of changes in price, advertising, and promotion may be measured using the test market tool to help you estimate the sensitivity to adjustments in these variables. Of course, this tool assumes that there are no other changes to either your product or competition. This brings us to the most difficult assessment you must make—what will the competition do and how might this affect next period’s market share for the product? The most important issue to note is whether a new competitor is entering into the same market or vehicle class as the product. In the industry news report, all new products (new class) entries are announced one period before the vehicle is sold in the market. This information is important to consider as it will impact your sales forecast, and perhaps as importantly, create a much greater margin for error in the forecast. However, upgrades and new products (same class) are not announced in advance and these will also impact sales. By analyzing historical trends, available development centers, and competitor past behavior and intent, you may be able to gain some insight as to what the competitor is likely to do with regard to upgrades. There are two final considerations when deciding on production volume. First is your assessment of the risk of losing sales (due to under production) against the cost of holding excess inventory (due to over production). Some of the factors to take into consideration when weighing lost sales versus holding costs are the margin on the product, your plans to upgrade the product in the future and thus obsolete current inventory, and the cost of capital used to build inventory. The second consideration is the potential cost of retooling. Remember that anytime production is increased from the previous period, a retooling charge is assessed. Therefore, a steady production volume over time is preferable to one with significant variation, all things being equal.

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Unit Margin Unit margin is defined as the difference between your selling price (which in StratSim is your MSRP less your dealer discount) and the unit variable cost or cost of goods sold (COGS). Unit margin is how much your firm makes on each vehicle sold. In a business where the variable costs are a high percentage of your selling price, pricing and unit cost savings are especially important. This is certainly the situation in StratSim where COGS is often between 65-85% of revenues (or on a per unit basis, of the selling price). Therefore, pay close attention to the impact of pricing and variable costs on the profitability of your business. Let’s explore these two areas in more detail. Unit Margin: Selling Price Pricing is one of the most critical issues facing a firm. This is because the pricing decision influences all parts of this performance equation. In the profit equation, pricing affects the revenue inflow side of the margin (what the firm receives when it sells a product or service). But the pricing decision also impacts: 1) your market share due to price relative to the competition, 2) overall demand due to general price levels in the market, and 3) COGS due to potential changes in volume sold (and produced). Let’s briefly consider how important this margin is. Let’s say your business currently sells a product for $100 and COGS is approximately 80% or $80. If you decide to reduce your price by $10 and the COGS remains the same, you have also reduced your margin by $10. On a percentage basis, however, you have cut your margin by 50% ($20 reduced to $10). This means that unless unit sales doubles, your profits will decrease. So tactically, at least in the short-term, your firm should be asking whether a 10% reduction in price will double your sales. Alternatively, consider a $10 increase in price with the corresponding increase in margin of $10/unit. On a percentage basis, you have increased your margin by 50% ($20 increased to $30). To maintain or increase product contribution, your sales can decrease by 33% and be no worse off with regard to contribution. Examining the price expectations in consumer segments and utilizing tools such as "focus groups" and the "test market" can help you evaluate these trade-offs. Basically, these tools are provided to help you understand the price sensitivity or price elasticity for your target market. So, that is the tactical nature of the pricing decision, but pricing has far greater strategic implications.

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Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC Base Demand Economic Cycles Industry Dynamics

Product Fit Competition Price Relative Spending Quality of Spending Service / Distrib. Preference

(MSRP – %) Value

Price Sensitivity Positioning

Cost position in industry

Let us consider some of the more strategic aspects to this pricing decision. Most of these have to do with the dynamic nature of strategy. First, price advantage is often temporary. A competitor can easily (and quickly) drop (or increase) prices if their cost position is equivalent. Is this a dynamic that you want to engage in with your competition, or would other ways to compete be more effective over the long-run? Second, consider the possible impact on the scale of your business. Is it appropriate to assume that fixed costs will remain the same, or will a price reduction require new investments in productive capacity? A third strategic consideration is how you want to position yourself in the marketplace. Is it important to have a consistent message as being a high-end or value provider? Price points send a message to consumers about what they might expect from your company and vehicles (just make sure you deliver if you are high end!) You may want to frame the question of reducing (or increasing) price as one of many alternative "investments." For example, you might estimate that cutting price will cost $50 million in lost margin. Are there better uses for that investment? Can you instead capture that value, and reinvest it in either product (or service) enhancements or cost reduction opportunities? Or, conversely, would your target customers be willing to pay more for product improvements? The main point is to think carefully about pricing. Consider the impact on your profitability and the potential for competitors to match the price. Think about consistency across your product lines with regard to positioning. Always understand the financial implications of your pricing choices. The pro- forma contribution and pro-forma income statement can be of great value in trying out different scenarios. Unit Margin: Cost of Goods Sold (COGS) The other half of the margin equation is your cost of goods sold (COGS). What impacts these costs? How can your firm strive to lower the unit cost of a product? The cost of your vehicle is based on the specifications of the vehicle of size, HP, and ISSQ (which is an abbreviation for interior, styling, safety and quality), the technology capabilities of your firm,

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and the volume produced of that vehicle and vehicles in the same class (experience effects). All firms in the industry are also impacted by changes in labor and materials costs over time.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC Base Demand Economic Cycles Industry Dynamics

Product Fit Competition Price Relative Spending Quality of Spending Service / Distrib. Preference

(MSRP – %) Value Price Sensitivity Positioning Cost position in industry

Size, HP, ISSQ Upgrades

Technology Volume

There are several drivers of cost savings in StratSim including learning curve effects, cost savings through product design, and investments in technology capabilities. Experience Curve Effects. The experience effect shows that with each doubling of cumulative volume, there is a fairly consistent percentage decrease in unit costs. In StratSim, there are experience curve effects present at both the brand level and the class level. Therefore, all things being equal, a firm that has higher production volume of a particular brand, or of a particular vehicle class, will enjoy a cost advantage over those products or firms with lower production. For example, if experience effects of 90% are present, and the unit cost of the 100,000th vehicle is $10,000, the cost of the 200,000th vehicle produced will be $9,000 ($10,000 x .90). Savings through Product Design. It is important to recognize that the product design process has an impact on unit variable costs. Part of this is determined by the specifications of the product, with higher values increasing the unit costs, all other things being equal. However, one of the major sources of lowering unit costs is provided through the upgrade process. When a vehicle is upgraded, along with creating the new product design, the engineers working on the product also attempt to find ways to lower the cost of the product without sacrificing the value that the customer perceives in the brand. Your firm can calculate the impact of the cost savings of an upgrade by choosing a cost reduction project which, by definition, makes no changes to the specifications, but only lowers costs via other design improvements. Compare the base cost on the original ("previous") product design with the upgrade. Savings through Investment in Technology Capabilities. Finally, a firm may invest in technology capabilities allowing a firm to create vehicles with higher specifications, while also decreasing costs on existing vehicles. An estimate of the savings based on your current product portfolio and projected sales is provided on the "technology capabilities" input screen. More specifically, a firm with higher capabilities in ISSQ is able to produce an identically specified vehicle at a lower cost than a firm with lesser capabilities in ISSQ.

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It is essential that your firm considers the effectiveness of using these cost savings techniques in the context of your overall strategy. Cost savings are a net positive whether they improve your profit margin or are passed on to the customer in hopes of gaining more sales. However, remember that it is implementation of "smart" cost savings that is ultimately rewarded. Having the largest production capacity is only an effective cost savings if that capacity is used in production (and sold). Having a low-cost vehicle is only effective if consumers still want to purchase it. Thus, the successful manager is always looking for ways to lower cost, but keeps an eye on whether that cost savings is ultimately rewarded by affecting the bottom line. Fixed Costs Fixed costs are costs which do not fluctuate based on units sold, even if those costs are discretionary. Thus, investments in upgrades, new products, technology capabilities, development centers, new capacity, distribution, advertising, etc., generally are the same regardless of the level of unit sales in the market. This is not to say these investments will not have an impact on unit sales. The firm makes these investments in the aggregate and then unit sales occur. The amount of fixed cost per unit is just the division of the amount of fixed cost by the number of units sold.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC Base Demand Economic Cycles Industry Dynamics

Product Fit Competition Price Relative Spending Quality of Spending Service / Distrib. Preference

(MSRP – %) Value Price Sensitivity Positioning Cost position in industry

Size, HP, ISSQ Upgrades Technology Volume

R & D Capacity Tech Invest. Distrib. Adv. Interest Tooling etc.

Strategic and tactical questions your group should discuss pertain to which of the fixed cost investments should be made to positively influence the rest of the profit equation. Should the focus be on product improvement, corporate infrastructure, technology, cost reduction, marketing, distribution, etc.? Generally, over the course of the simulation, your firm will likely invest in all of these areas, but the questions of priorities, direction, and financial benefit must be reviewed in the context of your overall strategy and objectives. As a group, you will also have to find the proper balance between short-term and long-term perspectives. Obviously, the best way to maximize profit in the short-run is to not invest in any long-term projects that have no immediate impact. The related corollary is also true, that a company that only makes short-term investments will face long-term challenges. StratSim reflects this need for balance in time horizons.

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The above discussion relates to the strategic nature of alternative fixed investments. However, there are also important operational elements to manage as well. For example, your firm may find that fixed expenses are consistently running high and putting pressure on profits. How does this occur? One fairly common source of trouble is having too large an operation for your level of sales. To check for this, compare your sales with your capacity. If your sales are less than 70% of your capacity, you have a large fixed asset that is not productive and only adding to your on- going costs (depreciation and plant maintenance). If this is an on-going concern, you may want to consider selling / writing-off some of your plant capacity. Although resulting in a one-period loss, it may improve overall future performance. You also may want to check your expenditures on R&D and marketing versus the industry averages. If you are significantly out of line and it is not part of your strategy, you may want to rethink this level of expenditures. Typically, firms that are struggling with high fixed costs relative to their total gross margin will find themselves going into debt. The associated debt interest payments then become another fixed cost to manage. The cost structure of the firm not only impacts the profit equation but also the firm’s cash flow. Certain fixed costs that are charged to the fixed cost part of the profit equation are amortizations of investment in capacity, development centers, etc. The cash required for these investments is often expended earlier than the full charges to the profits equation. Thus, the firm will need to be concerned with both the profit and cash flow aspects of fixed costs. Your firm will want to try to make sure that it has sufficient funds from operations available early in the simulation to fund any long-term projects and weather any challenging periods. This may not be possible and thus the appropriate use of the debt and equity markets to satisfy the firm’s cash needs may be necessary. Last, there are some "hidden" costs of doing business that you should try to control. These include on-going inventory write-offs, high retooling costs and the like. Generally this is due to poor forecasting, which, as was discussed earlier, is not a simple issue. However, as you gain experience and make better use of the tools, you’ll find you can improve your ability to manage these operational issues.

Monitoring Performance and Pro-Forma The best way to analyze the profit equation during the decision-making process is by using the pro-forma analysis. The pro-forma reports use your forecasts and the cost of your decisions and allow you to calculate financial statements based on these assumptions. It is important to recognize that your forecasts are what drive unit sales in the pro-forma analysis; the simulation does not forecast sales for you. However, the pro-forma analysis will allow you to test your assumptions about the profit equation and basically answer the question, "If we make these decisions and achieve our forecasts, what will be the financial outcome?"

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Note: All of the examples below

are for a simulation that is in the 2nd round. In other words,

teams are reviewing second

period results and making decisions for

period 3.

Once you have made your decisions and the simulation is advanced, compare your estimate of results from the pro-forma (sales, market share, net income, etc.) with actual results. If there is a significant difference between the two, you should find out why. Sometimes results will be better than expected. Other times (and probably more often), results will be less than you hoped. Use downturns as motivation to better understand your business.

Long-Term Planning in StratSim In StratSim and strategy in general, decisions often take time to implement and to have an impact in the marketplace. This section discusses some of the most important timing and staging issues in StratSim to allow you to plan your timeline accordingly. Some decision impacts are immediate (that is, a decision made and after the simulation is advanced, it impacts the results) while the initial impact of other decisions may be delayed for up to two additional advances. In addition, some decisions have longer-term effects. New products sell for multiple periods; advertising has both an immediate and long-term effect through building brand equity; investment in technological capability, development centers, dealer capacity, plant capacity, etc. have longer term impacts. Finally, remember that costs and cash flows do not always match up with these effects, so one must also take into consideration availability of funding for various investments. It is essential that you understand the staging of various decisions for planning purposes. The graphics below should help you with this staging process. You may also want to review the table in the case that covers product development. The following graphics also show related issues that should also be considered (such as disposing of inventory and adjusting production when a minor upgrade is implemented).

Timelines Marketing Mix Decision Timeline (Immediate)

Marketing mix decisions (pricing, advertising, promotion) have immediate impact on results and therefore production should be adjusted based on the expected impact of the revised decision as shown below.

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Capacity Decision Timeline (Capacity Available in the Following Year) When adding capacity, cash is used to build the additional productive capacity immediately, but the additional capacity cannot be used until the following decision period. Remember there is a maximum change of 50% of current capacity in any period. When selling off capacity, the loss shows up as an extraordinary item after the advance and there is a cash inflow of the sales price of the plant (50% of book value).

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Product Development Decision Timelines (Immediate to 3 years) For all upgrades and new products shown below, a simple rule to remember is that: A brand will become available for sale in the last year it is in the development center. On the development center screen it will show a message such as "launch now". Now we will review each of the product development options in more detail. Minor Upgrade (Launch Now) Minor upgrades are the fastest way to get product changes into the market. Basically, the same period you initiate the minor upgrade is the period you also prepare for the upgraded brand’s introduction into the market for sale. The maximum change for a minor upgrade is 1 on the four vehicle specifications, 5 on HP, and 2 on size. A minor upgrade is in a development center for one period. Also remember that any existing inventory will be written off at a cost of approximately 10% and that production must be adjusted immediately upon initiating the minor upgrade.

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Major Upgrade (Launch after 1 Advance) Major upgrades take one period longer than minor upgrades, but also allow you to make more significant changes to the product. They occupy a development center for two periods rather than one period as in minor upgrades. The maximum change for a major upgrade in the first year is 2 on the four vehicle specifications, 20 on HP, and 10 on size. These may be modified in the second year. Because major upgrades take an extra period, you will be charged half of the total development cost in the first period of development and the remainder in the second period. Also note that you may make additional changes to the specifications in the second year of development and that any existing inventory will be disposed in the second period when the major upgraded vehicle is offered for sale in the market.

New Product in the Same Class (Launch after 1 Advance) New product in the same class has the same timing as a major upgrade but without the complication of potentially disposing of inventory. A development center will be occupied for two decision periods and the development costs will be divided equally between the two periods. The one additional consideration here may be adding capacity (if needed—it is not a requirement if you have sufficient capacity to produce all your product lines). For a new product where you already have developed a vehicle in the same class, the decision to add capacity should be done in the same period that you start product development as shown below.

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New Product in a New Class (Launch after 2 Advances) New product in a new class works much the same way as a new product same class, except that it takes one additional period to complete. In this situation, capacity (if needed) would be added the period after the product development project is initiated. Also note that a development center will be occupied for three rounds. So it is important to plan accordingly. Development costs will be spread equally over the three periods it resides in the development center.

Development Centers (Center available after 1 advance) If you find the need to add a development center, you must think ahead as it takes one period before it is available to be used for development projects. However, the cash used to build the center will be used and expensed immediately. The firm needs to make an assessment as to the number of development centers that will be needed, when they will be needed, and how to raise the funds necessary to build them. Only one new development center may be added in a given period and there is a maximum of five total centers for any firm.

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Technology Investments (New Limits available after 1 advance) Investing in technology works much the same way. It will take one year to increase that capability. Remember that investing in technology only increases your ability to design a vehicle with higher specifications. It does not automatically implement those changes to your existing vehicles. You must explicitly use upgrades to accomplish this. So again, it is important to plan ahead.

Dealership Decision Timeline Dealerships also take a year to build. This delay makes sense as it takes time to build new buildings and hire personnel to expand your channel presence.

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Conclusion To summarize what was covered in this section, here are six key points to review with your group as you work through the simulation.

• Understand the business situation through internal and external analysis • Create an agreed upon vision and mission for your company • Establish a process for group analysis and decision-making • Use the concept of the profit equation to better understand the dynamics and financial

implications of your alternative decisions • Use the pro-forma reports to check your sales and financial assumptions • Make sure part of your long-term planning process takes into account the time required

to complete various strategic decisions Using this strategic checklist will help your group stay on track strategically and help you avoid many of the reactive pitfalls that naturally occur as competition intensifies. Best of luck managing your company!

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Operations Guide

STRATSIMMANAGEMENT

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This chapter contains the information needed to make the decisions for each period and to interpret the results found on the reports.

Simulation Navigation This section gives an overview of the simulation interface. The header of the simulation interface persists regardless of what page you’re viewing. The header contains menu categories, the period selector, and four icons: Chat, Decision Alerts, Decision History, and User Menu. A link to the Showroom is connected to the header. Under the header, you may find additional options that depend on the page you’re on.

Menu Categories This is the core of the simulation that gives you the information and tools you will need to analyze your current position, plan a strategy, and input your decisions. The categories are Introduction, Company, Market, Competition, Tools, and Decisions. One of the easiest ways to find out more about an option is just to try it out. However, keep in mind that you share a common set of decisions and report purchases with team members. Report purchases cannot be undone, and there are restrictions on the quantity of each report a team

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can purchase. On the other hand, decisions can be changed as much as you like until the simulation advances to the next simulated year. Period Selector The period selector lets you choose which year, or period, in the simulation you would like to view. It defaults to the current year. Changing from the current year allows you to view historical information. You can only enter decisions in the current year (for the following year). You can look at the past using the period selector, but it won’t let you change previous periods’ decisions. Check your simulation schedule to see when the simulation will advance to each year. Header Icons Clicking the Chat icon allows you to communicate in real time with your teammates. You can also view a history of previous conversations here. The Decision Alerts icon has a badge that shows the number of errors and warnings with your decisions. Click on the icon to see details of the alerts, which advise you of potential decision input errors. These timely messages to your firm may warn you of no changes entered in your product decisions, no launch information entered for new products, unused concepts that have not been put into development, production of zero units, and no changes in non-product firm decisions. While some of these may be your intent, it is always worth checking these messages so you can enter any necessary adjustments to your decisions before the simulation is advanced. The Decision History icon gives you a full history of who made what decision when. The log also keeps track of advances, replays, and restarts. The User Menu gives information about you (e.g., whether you have the leader role), let’s you change your personal theme, and provides links to pages where you can export and print, en masse, pages from the simulation. Showroom Click on “Showroom” to open a side panel that shows a list of all vehicles firms currently have and information about the vehicles. The list of vehicles can be filtered by firm and class. Clicking on a vehicle name expands the side panel to show more information about the vehicle. The Showroom duplicates information from the Competition / Products report, making it easily available while you’re making decisions. Page-Specific Options Most pages have a help icon. Click the question mark icon to open the operations guide to information about the page you’re viewing. Most pages will also have a menu of other options.

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These options typically include the ability to view the page’s contents in another window, print the page, and export the page’s data to an Excel file. Decision pages have save and undo buttons. Team leaders will see padlock icons they can click to lock decisions and purchases of reports. Locking prevents other team members from making changes. It isn’t necessary to lock decisions. Data in screenshots may not match your simulation. Also note that demand in a particular market may change at any time. Costs are not fixed; they may increase or decrease without notice as the simulation progresses.

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Introduction Introduction This page helps orient you to the simulation. Case Prepare to make your first set of decisions by reading the simulation case, which presents the simulation's scenario in a form similar to a business school case. The time you invest in reviewing the information in the case will help greatly in your decision-making process. Please read it carefully. Tour The tour takes you through the simulation interface element by element and page by page, offering a brief description of each. Glossary The glossary provides a list of important terms (and their definitions) for learning the principles of strategy and competing in StratSim. The glossary also appears in the appendix of the StratSim manual. Accessibility Here you can enable the Accessibility View, which is helpful, for example, if you can interact with the simulation interface only with a keyboard or if you are visually impaired.

Company Dashboard The DASHBOARD has three parts: the Executive Dashboard, Industry News, and Special Decisions. The Executive Dashboard summarizes important performance measures for your firm and indicates the trend and relative rank within your industry for each measure selected. Industry News is a great place to start the external, or environmental, analysis process as it provides information on high level events shaping the industry. The Special Decisions section announces new special decisions and the results of your response to previous special decisions, if any. Executive Dashboard You may add performance measures to your Executive Dashboard (and are encouraged to do so!) based on what you find most important to monitor. Click the Edit button (top-right corner) to add to or remove previously selected performance measures. A brief explanation of each

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Dashboard performance measure is provided below. The first four measures are always shown in the dashboard. The others are optional and based on your objectives.

Net Income ($)* Net Income after taxes Cum. Net Income ($)* Total Net Income after taxes generated since the start of simulation Stock Price ($)* Current stock price (in $) Total Shareholder Return (%)*

Annualized return based on the purchase of a firm's stock at the beginning of the simulation (included appreciation and dividends paid)

Cash (M$) Cash account balance from the Balance Sheet Debt (M$) Combined short- and long-term debt outstanding from Balance Sheet Firm Preference (%) Percent of consumers surveyed that prefer your company

Dealer Rating Dealer experience on a scale of 1-100 based on a survey of those who visited dealerships for service or new vehicle purchase.

Capacity Utilization (%) Actual vehicle production divided by firm capacity

Days Inventory Current estimate of how many days of inventory remain in stock at period end based on current demand for vehicle and inventory level.

Gross Margin (%) The difference (as % of sales) between sales and cost of goods sold. Revenue (M$) Sales Revenue for the firm Value Market Share % Sales Revenue for firm divided by sales revenue for entire industry Unit Sales (000s) Vehicles sold for the firm Unit Market Share (%) Vehicles sold for the firm divided by total vehicles sold for industry Marketing (M$) Expenditures for corporate and brand advertising and promotion R&D (M$) Expenditures in technology and product development for firm Market Research (M$) Expenditures in market research and tools for firm Earnings Per Share ($) Net Income divided by shares of stock outstanding Shares Outstanding Number of shares of stock outstanding Return on Sales (%) Net Income divided by sales revenue Return on Equity (%) Net Income divided by equity Return on Assets (%) Net Income divided by assets Debt to Equity Ratio of total debt to equity

Industry News Industry News highlights significant events that occurred throughout the industry in the previous period and information about the state of the economy. News items include product launches and upgrades, planned launches of new products into new classes, new development centers, drastic changes in stock prices and market share, and other news of general interest. Finally, if there are any incidents to address in the current decision period, these will be listed here with a short description. Less important information is not included in the report, such as minor fluctuations in stock prices or market share. Links to important information, such as new product attributes, are embedded in the text. New vehicle class launch plans of your competitors (3 year projects) are announced in Industry News in the period before the launch, and licensing agreements are shown in the period vehicles are launched.

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Though the Industry News report is rather brief at the beginning of the simulation, you can be assured this screen gets considerably longer as the game progresses!

Product Contribution The PRODUCT CONTRIBUTION menu provides financial results at the product level. This report is particularly beneficial for comparing the profitability of various product lines and provides insight for pricing decisions from an internal perspective. Three different analyses are accessible within this report via the tabs at the top: Total, Per Unit, and Percent. These provide product level insights into pricing and costing factors. However, it does not include any allocated overhead costs, only variable costs (COGS) and marketing costs directly attributable to a product.

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Total Provides overall contribution based on total revenues for the product (dealer invoice multiplied by units sold). Sales made other than through your own dealers (B2B, licensing) will appear in the "Direct Sales" column. The sum of the "Revenue" and "Direct Sales" columns equals the "Sales" value from the Income Statement. The cost of goods sold (COGS) and expenditures on advertising and promotion are then subtracted to calculate the overall contribution of each product. Per Unit In this report, the focus now shifts to product line profitability on a per unit basis, removing the unit volume from the results. This answers the questions, what are my variable costs per unit, how much are we spending on advertising and promotion per unit ($budget / volume), and what is per unit contribution. Not that this report includes direct sales; so this analysis is based on average revenue and margin over all sales including those to the B2B market. Percent The Percent button will now shift the report to a percentage basis which normalizes all values relative to price. This report calculates the margin percent and contribution percent which are helpful measures for pricing decisions. Income Statement The INCOME STATEMENT shows the firm's overall results for the most recent year with major expenditures broken out. Each line item is also displayed as a percent of manufacturer sales (not retail sales) for year-to-year comparative purposes.

Sales Sales are recognized at the time of purchase by the customer. The dollar amount is based on dealer invoice, not retail price or MSRP. Click the link to see the breakdown by product revenues.

COGS Cost of goods sold (COGS) is the total manufacturing costs including fixed costs related to production. Click the link to see COGS details.

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Gross Margin The difference between sales and cost of goods sold. Shareholders often analyze the gross margin % year to year as one measure of profitability.

Marketing The sum of corporate advertising, public relations, product advertising, product promotion, and sales force.

Research & Development

Research and Development are the costs associated with product development and technology increases.

General and Administrative

General and Administrative includes overhead from sales and the dealership network. Dealership training and the cost of changes in the number of dealerships are the result of your decisions, but most G&A expenses are not under your direct control.

Income from Operations

Results from deducting expenses from gross margin.

Interest Income Interest generated from CDs held. Interest Expense Interest on long and short-term debt. Extraordinary Items

Includes plant and inventory write-offs.

Income before Tax

Income from Operations less extraordinary items and interest expense.

Less Tax @ 35% Taxes charged at the rate for your industry environment. Net Income Net Income less taxes. Dividends Paid The dividends paid to stockholders.

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Balance Sheet The BALANCE SHEET shows the current account balances for assets, liabilities, and shareholder equity at the most recent year-end. A sample screen is shown below.

Asset Categories

Cash Current cash balance on the books. See the Cash Flow statement for more detail on how cash is generated (or used).

1 Year CD Inv. Value of any CDs purchased for the year. Receivables Outstanding invoices unpaid by dealers. Inventory Current value of finished inventory. Plant and Equip.

Original value of the plant and equipment used in production of the vehicles. This includes retooling investments.

Depreciation Accumulated depreciation on assets. Plant, equipment, and retooling costs are expensed over 10 years using straight-line depreciation.

Liability and Equity Categories Accts Payable Amount currently owed to vendors. Short-Term Debt

Outstanding short-term lines of credit used to fund on-going operations, typically resulting from underestimating cash needs in the current year.

Long-Term Debt

Face value of long-term bonds that were issued.

Stock Original value of any stock issued at $1 par value. Retained Earnings

Accumulated net income from previous years.

NOTE: Please refer to DECISIONS: Financing in this section of the manual for more information on debt and stocks.

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Cash Flow The CASH FLOW statement shows the sources and uses of the firm's cash. Changes in the amount of cash in the firm can be calculated based on cash flow from operating, investing, and financing activities. Line items may have different context modifiers as indicated by parenthesis. Using the Inventory line item as an example, a positive inventory cash flow amount indicates an increase in cash due to a decrease in inventory, and a negative inventory cash flow amount indicates a decrease in cash due to an increase in inventory. If a value is in parenthesis, it refers to negative cash flow (cash out).

Cash Flow from Operating Activities

Includes Income from Operations plus depreciation and any changes in inventory, accounts receivable, and accounts payable.

Net Income This figure comes from the Income Statement. Investment Activities

Related to manufacturing or cash investments, such as increases in capacity and retooling costs.

Financing Activities Include proceeds from short-term loans and bonds or stock issues less interest and dividends paid (see following page).

Net Increase (Decrease) in Cash

Total of changes in cash from operating, investing, and financing activities.

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Market Economic Outlook The ECONOMIC OUTLOOK report provides a very brief overview of the general economic conditions for the current year, past year, and a forecast for the coming year to help with financial decisions. Economic strength (based on GDP growth) and low interest rates typically have a positive impact on car sales. The inflation rate and increases in material and labor costs should be considered when making pricing decisions. The Prime Rate is the underlying index for most loans and therefore is the basis of the borrowing rate for firms along with duration and risk. The Cash Rate is the interest rate paid on 1 year CD investments. Availability: Always Available | Free | No Restrictions Dealer Car Sales equals the total sales of economy, family, luxury, sports, and AEV classes. Dealer Truck Sales equals the sales of minivan, truck, utility, and delivery classes. If enabled, B2B Direct Sales total will also be shown in this report. Sales by vehicle class can be found in the MARKET: Vehicle Sales report.

The graph displays data from this report over time. The default graph is a plot of the Economic Indicators over time, but you may also select Gas Prices or Car, Truck and B2B Sales using the drop-down list box as shown in the example to the left.

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Vehicle Sales VEHICLE SALES provides more detail on two standard industry categorizations – Region and Vehicle Class. REGION ANALYSIS provides insights for distribution decisions while CLASS ANALYSIS will help your firm assess the relative attractiveness of the various vehicle classes. Availability: Always Available | Free | No Restrictions Class Description The CLASS DESCRIPTIONS report provides a graphic of the relative size of the vehicle classes based on unit sales as well as a description of each vehicle class. In StratSim, there are multiple vehicle classes as shown in the graphic to the left and other classes may be developed and introduced as the simulation progresses. Click the graphic (i.e., the slice of the pie chart associated with Utility vehicles) for description of the vehicle class as displayed in the example at the left.

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Region Analysis VEHICLE SALES summarizes vehicle sales by class, region, and B2B (if selected). Click a vehicle class (i.e., Economy) to view details of product unit sales by region and a graph illustrating product market shares for that class (as shown on previous page). Click on a region (i.e., North) to view dealerships and sales by firm on a regional basis. Vehicle detail available on a pop-up basis.

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Class Analysis This report provides a selectable pie chart of unit market share by vehicle class. Clicking on a piece of the pie (or into the class from the list at right) will provide more detailed information about the products competing in that vehicle class. Several pull-down graphs are also available for the selected class. The link to a vehicle class (such as, Family) provides details of the vehicle class market share and marketing information. This information includes vehicle sales (in units), share of class, overall share for the vehicle, MSRP, advertising budget and theme, and promotional budget. It also will open up some of the graphical analysis tools for this report, which is described in further detail on the following page. Clicking a vehicle name link will open a pop-up window with additional product details.

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Class Analysis: Graphical Analysis Associated with the vehicle classes are five analysis graphs: Units Sold, Unit Share, Positioning Map, Advertising and Promotion. All but the positioning map are fairly straightforward graphical aids.

The POSITION MAP provides a visual representation of expected Vehicle Size and MSRP ranges for a particular class, including how vehicles in that class are positioned on these two dimensions. In the example, the boxed area denotes the expected price and size ranges for the economy class. The two economy class vehicles, Alec and Delite, are marked A and B and are listed in the legend in the order of sales. Thus, the sales leader for this class is Alec. Based on this plot, one can say that Alec is larger and higher priced than the Delite, that the expected price of an economy vehicle appears to be under $20,000, and that the expected size of an economy vehicle is less than 35.

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Consumer Segments CONSUMER SEGMENTS brings the consumer into your analysis at a high level. SEGMENT SALES provides information about relative attractiveness (sales, growth and preferred vehicle class) of each consumer segment and SEGMENT ANALYSIS provides information about segment preferences. Availability: Always Available | Free | No Restrictions Segment Descriptions The SEGMENT DESCRIPTIONS report provides a graphic of the relative size of the consumer segments based on unit sales as well as a description of each segment. In StratSim, there are five consumer segments labeled 1–5. Within each segment, there are multiple microsegments with different transportation needs. Demographic and psychographic characteristics also vary by segment. Click the graphic (i.e., the slice of the pie chart associated with Families) for description of the segment as displayed in the example at the left. To learn more about the preference of the various segments, use the SEGMENT ANALYSIS button as described on the following page.

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Segment Analysis SEGMENT ANALYSIS provides additional information about each segment including the retail sales, unit sales, and preferred vehicle class. Click a segment link (i.e., Families) for the Preferred Vehicle Class and Firm Shares reports. The first report provides more preference details based on the segment’s preferred vehicle class(es), including expected price range, preferred vehicle size, most important vehicle attribute, and the top selling vehicle. The second report provides additional detail based on the firm, including retail and unit sales, market share, and top selling vehicles.

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International INTERNATIONAL compares economic conditions as well as vehicle production and delivery characteristics for the Domestic, Pacific, and Atlantic regions. This information helps you assess how attractive a region is for sourcing. Availability: Instructor selected option | Free | No Restrictions The quantitative comparisons among the regions update from period to period. All dollar values in the simulation are in domestic currency. Using the data in the table, you can estimate fixed and variable costs incurred for production in each region. Click the Pacific or Atlantic table headings to view qualitative descriptions of the regions; the descriptions don’t change for the duration of the simulation. Although the regions may bear some resemblance to actual regions, one should carefully analyze the market information and not rely on perceived similarities with actual countries or regions.

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Competition Products The PRODUCTS report provides side-by-side comparisons of the main characteristics of each vehicle in the market. Each vehicle’s class, price, size, engine, interior, styling, safety and quality are displayed along with its overall market share. Click a column title link to reorganize the data by vehicle Name, Class, Units Share, MSRP, or Size. Availability: Always Available | Free | No Restrictions View in-depth product details by clicking a vehicle name link (such as Alec or Boffo). The detail report includes all relevant information on a particular vehicle, including current attributes, prices, and marketing strategies, along with attributes over time.

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Technology This report displays the current Interior, Styling, Safety, and Quality (ISSQ) technological capabilities and the development center count for each firm. These values represent the maximum ISSQ the firm can achieve in the current period using product development. The current maximum feasible limit for ISSQ for any firm is also shown. The maximum limit may change over time if new breakthroughs are discovered and represents the highest value any firm can achieve long-term through investments in technology capabilities. Availability: Always Available | Free | No Restrictions This example shows the most appealing product Firm A can create is one with interior of 5, styling of 5, safety of 4, and quality of 6. All customers find higher values in these areas more appealing than lower values. Should a firm consider the investment worthwhile, increases in ratings can be achieved long-term through investments in technology capabilities up to the current maximum feasible of 9, 11, 9, 11. For insight into a firm's possible future vehicle generations, click a firm link (Firm A through Firm E). These details contain the history of the firm’s investment in technology capability.

Definitions Interior (I) Flexibility of the cargo space. Styling (S) General curb appeal, styling, handling, finish. Safety (S) Structural design, braking systems, safety features. Quality (Q) Overall reliability, durability, consistency of product.

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Marketing Communications The MARKETING COMMUNICATIONS report summarizes information on marketing expenditures and firm brand equity as measured by market share and firm preference. Brand Advertising and Brand Promotion are the total of individual products. Val. Market Share equals firm sales ($) divided by total industry sales ($) at the manufacturer’s level (not retail). Unit Market Share equals firm sales (units) divided by industry sales (units). Firm Preference is the measure of customers that showed an overall preference for doing business with a particular firm based on vehicles offered, dealership reputation, and other factors. Historical Graphs include Communications Expense, Unit Share, and Firm Preference all available using the drop-down box. Availability: Always Available | Free | No Restrictions Click a firm name link to display that firm's marketing expenditures and decisions broken down by category, and vehicle-specific marketing mix decisions. To re-display the firm level graphs after viewing details, click the X at the top right corner of the Marketing Details section. Click a vehicle name link (e.g. Defy) to display that vehicle's Product Detail screen which provides information on key marketing details over time.

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Distribution The DISTRIBUTION report summarizes information about the dealer networks for all firms. These include current and previous number of dealerships, scheduled openings, spending on dealer training/support, dealer ratings, and inventory data. Availability: Always Available | Free | No Restrictions Historical Graphs include Dealer Rating, Inventory, Dealers, and Dealer Training over time. Dealer Rating is a customer satisfaction index from a leading market research company and ranges from 1–100, where 100 corresponds to highest satisfaction. Dealer ratings provide insight into the success of dealerships based on the customer experience during sales and service visits. To view a firm’s Distribution Details report which includes dealership performance on a regional basis, click the firm name link (e.g. Firm A through Firm E). Details include the coverage ratio,

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planned openings, sales and support per dealer, dealer ratings, and specific vehicle sales by region. Coverage is the number of dealers divided by the number of sales territories in a region. Thus, coverage of 45% would imply that 45% of the sales territories are served by dealerships in a particular region. Gross/Dealer represents the average amount of money (gross) that a dealer has to operate their business.

Manufacturing The MANUFACTURING report displays production capacity, actual production, capacity utilization, sales, and inventory (in 000s and days) for each firm. Comments may also be displayed including alerts for product shortages, production greater than demand, or demand being greater

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than capacity. Graphs including Plant Utilization, Units Sold, Inventory, Production, and Capacity display data over time for all firms in the industry. Firm-specific manufacturing details can be viewed by clicking a firm name link. The Details report provides Production, Sales, Inventory, and Days Inventory for each product line. Days Inventory is an estimate of the number of days of inventory available at year-end based on yearly sales and is derived by the formula (365 x units inventory / sales). In the Comment field, a number of messages may appear including estimates of shortages, sales exceeding planned production, and if a product is upgraded or new.

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Financial Summary This report provides a comparison of key financial and market performance data for all competitors, such as market share, firm preference, sales, COGS, income, stock price, and debt level. Click a Firm name to access all three publicly available financial statements (Income Statement, Balance Sheet, and Cash Flow described earlier under Results and Decisions). Mkt Value is the stock price times the number of shares outstanding. Note that each firm has a different number of shares outstanding at the start (and may issue or buy back shares). Graphs display historical graphs on key performance data for all firms.

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Val Mkt Share Firm sales divided by total industry sales at the manufacturer’s level (not retail). Unit Share A firm's vehicle sales in units divided by industry unit sales.

Preference Firm preference is a measure of customers surveyed who show a decided preference for a particular firm. This is based on overall vehicle offerings, dealership reputation, and firm awareness.

Sales ($) Sales are recognized at the time of purchase by the end customer. The dollar amount is based on dealer price, not retail price or MSRP.

COGS ($) Cost of goods sold (COGS) is the total variable manufacturing cost for the product sold. This is based on the R&D unit cost and the cumulative production.

Marketing The sum of corporate advertising, public relations, product advertising, product promotion, and sales force.

R&D Research and Development are the costs associated with product and technology development including process improvement costs.

G&A

General and Administrative includes overhead from sales and the dealership network. Dealership training and the cost of changes in the number of dealerships are the result of your decisions, but most G&A expenses are not under your direct control.

Other ($) Licensing fees, interest expense, plant and inventory write-offs, and income taxes. Income ($) Income after taxes. Stock Price ($) Current per share market value of the firm.

Mkt Value ($) Stock price times the number of shares outstanding. Each firm has a different number of shares outstanding and can issue new shares, so this is a better indicator of the relative value of the company than stock price alone.

Total Debt ($) Combined long and short-term debt.

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Tools Focus Groups ($) A focus group is typically a gathering of six to ten people with a facilitator designed to learn what participants think about particular product/service attributes, how they make purchase decisions, or any other information that may be relevant to the company. Availability: Instructor selected option | $50,000 each | No restriction on number of studies per period

Data is organized by customer segment and vehicle class and is summarized from focus group discussions throughout all regions of the StratSim world. To purchase a report, select the segment and vehicle class and click on the [Purchase the Selected Reports] button to see the focus group results as show below.

The STUDY RESULTS show the market share and customer opinions for the top selling vehicles purchased by the particular segment and class combination during the most recent period. Their responses provide descriptive measurements about the attractiveness of various vehicles to aid in R&D and competitive analysis. The columns marked "hot" indicate the most important attributes for the selected segment.

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Sales by Segment ($) The Vehicle SALES BY SEGMENT tool reports which customer segments are buying a particular vehicle and how many they are buying. This information identifies those customers most interested in a particular vehicle. Availability: Instructor selected option | $25,000 each | Maximum of 10 studies per period Data for this study is collected through a consumer survey of car buyers and and broken down by customer segments.

On the initial screen, select one or more vehicles from the list box. Clicking the [Purchase the Selected Reports] button will charge you for study and display the report, as shown below. Each column may be sorted by clicking on the column header.

Units are the unit sales to that segment. Percent of Vehicle Sales calculates the sales of a vehicle to a particular segment relative to all consumer sales of that vehicle (e.g., sales of a particular vehicle to segment / total sales of that vehicle). The Unit Share of Segment column calculates the sales of a particular vehicle sales relative to the total purchases by that segment (e.g., sales of a particular vehicle to a segment / all vehicles purchased by that segment).

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Concept Tests ($) CONCEPT TESTS allow firms to get early feedback on development products in the concept stage or that are already in development (upgrades and new products). Spending time with customers early in the process can save a tremendous amount of resources down the road. Availability: Instructor selected option | $100,000 each | Maximum of 10 studies per period Concepts, upgrades, and new products must be first created under RESULTS & DECISIONS: PRODUCT DEVELOPMENT before a test can be run. Once created, development projects and concepts can be tested against a segment/class combination and price point at a time. Within the context of the CONCEPT TEST study, the MSRP and retail selling price is the same. In reality, the actual retail selling price is rarely the same as the MSRP as the dealer decides on the retail selling price, often on an individual basis. To run a CONCEPT TEST, select the Segment, Vehicle Class, Project (Concept), enter Price and click the [Create Study] button. Each price, segment, class, and concept combination is a new study.

Study Results provide two helpful pieces of information on the development project. First is a summary of the target segment’s feedback on your vehicle similar to the focus group study. Second is the estimate of the percentage of people who are likely to purchase the product based on current competitive products and pricing. This estimate does not take into account competitive differences in distribution, advertising, preference, etc. Nor does it include potential sales to customers described by other segment/class combinations. Use the "Likely to buy" result only as a starting point in product launch production forecasts. For example, if the likely to buy is 20% and the target segment is forecast for 100K units, a good starting point for your forecast would be 20K (.20 * 100K) units.

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Competitive Mapping ($) The COMPETITIVE MAPPING tool is used to graphically track competitive movement on key decision variables over time, and becomes more valuable as the simulation progresses. Availability: Instructor selected option | $25,000 each | Maximum of 20 studies per period

Compare your product to a competitor's, or compare competitor products to each other. Select two products and two dimensions from among important marketing variables and product development specifications. Clicking [Create the Study] will charge you for the study and display the comparison grid similar to the example below.

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In the Study Results, selected products are represented as shapes and positioned based on the values associated with the dimensions chosen. Shape size scales with unit sales for the products selected. Movement reflects changing decisions by the associated company over time. Test Market ($) The TEST MARKET tool estimates the impact of changes in price, advertising, and/or promotion on awareness, market share, and contribution based on either simulated test markets or city level experiments that scale well to the national level. The test market study should mainly be used for estimating the sensitivity to changes in these marketing variables not as a forecast itself, as the sales forecast will be influenced by many other factors such as competitors’ decisions, product upgrades, etc. Availability: Instructor selected option | $100,000 each | Maximum of 10 studies per period

Select a product and enter the price (MSRP), advertising, and promotion levels (as if done nationally). The maximum change in price is +/- 10%. Advertising and promotion can be run at levels representing $50 million or double the current levels, whichever is greater. Clicking the [Run Study] button will charge you for the test, run the test market, and display the results.

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STUDY RESULTS show the current marketing expenditure levels as a Baseline, but may vary from national conditions. The Test column will show the test market conditions and resulting awareness, market share, and net contribution.

Note that these results are only estimates based on the test market and don’t factor in other changes in the market or competitive landscape that may occur in the decision period.

Portfolio Analysis The PORTFOLIO ANALYSIS displays your current product portfolio in a 2 x 2 growth-share matrix using the standard Boston Consulting Group (BCG) definitions (growth rate and relative market share) and terminology (star, cash cow, dog, question mark). The growth-share may be used to better understand the relative market and competitive position of the products in your portfolio and potentially to help determine resource allocation across a company’s product lines. A considerable amount of information is captured in this single graphic including a product’s:

• market attractiveness based on vehicle class or segment growth (vertical position) • relative competitive performance based on relative market share (horizontal position) • relative importance to the company based on sales (circle size)

This analysis may be run on a market definition of vehicle class or segment. By Vehicle Class Click the [By Vehicle Class] button to select the market definition to vehicle class. This view displays an overview of your competitive position relative to other products in the same vehicle class.

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By Segment Click the [By Segment] button to change your market definition to customer segment. Doing so will repopulate the analysis based on the customer segment that purchases the most of a particular vehicle. Growth and relative share are also adjusted accordingly. Market Attractiveness: Growth rates for product classes are found in the MARKET: VEHICLE SALES reports and analysis. Growth rates for segments are found under MARKET: CONSUMER SEGMENTS. Relative Share: In this study, relative market share is used as the measure of a product's performance. Relative Share is calculated by dividing a product's market share by the market share of its largest competitor. Obviously, share of market would be dependent upon the definition of market (as described above). Share of each brand for a product class is found in the MARKET: VEHICLE SALES -> Class Analysis and then clicking on a vehicle class. Share of segment is found in the MARKET: CONSUMER SEGMENTS and then clicking on a particular segment. As an example for how to calculate relative marketing share, if a utility vehicle has 47% of the utility class and its largest competitor has 19% of that same class, its relative market share is 47 / 19 = 2.47, placing it to the left of the vertical line. Thus, those products that are centered to the left of the vertical line are market leaders; those to the right are market followers (based on this definition of market).

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Decisions Technology TECHNOLOGY decisions consist of investing in the four basic technical capabilities of the firm, an important long-term decision. Higher technical capabilities bring two significant competitive advantages. First, your firm is able to develop vehicles with better characteristics, which is likely to be important to some customers. Second, the base cost of projects is lower with greater technical capabilities. In other words, a vehicle with attributes of 2, 2, 2, 2 (interior, styling, safety, and quality) costs less on a per unit basis for a firm with greater technical capabilities, given the same production levels.

Select the checkbox on the line "Increase Attribute" to invest in one or more of these areas. The cost of each of these enhanced capabilities in $millions is provided in the "Cost to Increase to increase by 1" line. The estimated annual benefit of the increase in capability is also displayed. Note that the simulation uses the decisions you are in the process of making to estimate the benefits. For example, an increase or decrease in your scheduled production of a particular vehicle will be reflected in the estimated annual benefit. You may "undo" any changes to these decisions until the simulation decision deadline. Product Development The PRODUCT DEVELOPMENT screen summarizes all activity in your development centers. Decisions include adding a development center, upgrading current vehicles, creating new vehicle concepts, and putting new concepts into development. Development costs are expensed in the current period, except multi-period development projects (major upgrades and new products) in which costs are spread over the time the project remains in the development center.

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Decisions: Projects The sample screen at right shows a firm with two active development centers, one of which is being used to develop a new Economy class vehicle that will be called the Enigma when it is released into the market. The specifications of the Enigma are listed to the right as well as the cost (this period only) for developing the product. The second development center is currently available for another project and could be used for a major or minor upgrade, or for another new product.

To add a development center, click the checkbox labeled "Construct a new center for $XXX Million". You may add only one development center each period, up to the total maximum of 5 centers over the course of the simulation. There is a one-time cost associated with building a new center, and it takes one year to become operational. To change one or more of product specifications of a vehicle in a development center, choose an existing vehicle to upgrade, select the type of upgrade to implement (minor, major, or cost reduction), and click the “Create Project” button. An upgrade also attempts to reduce your per unit cost of goods sold. A minor upgrade allows you to change each of the four vehicle specifications by 1, HP by 5, and size by 2. A major upgrade allows a maximum change of 2 for the ISSQ attributes, 20 for HP, and 10 for size; small changes can be made to the specifications in the second year. A minor product upgrade is in a development center for 1 period and launches immediately. A major upgrade allows a wider range of changes for each attribute to the vehicle but is in the development center for two years (launched the following period). A cost reduction upgrade attempts to reduce only the unit cost of the vehicle through changes to the vehicle that do not impact specifications or perception in the market.

Note: In the period a major or minor upgrade is launched, any current inventory will be sold off at a loss, and your firm will also incur a retooling

charge.

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Decisions: Concepts There are two categories of new product concepts—a new product within a class where the firm has experience, or a new product in a class that is new to the firm. The first step in launching a new product is the creation of a product concept. A concept in StratSim is a set of potential specifications for a vehicle to give to the R&D department for further study. Concept creation is not used to upgrade or change an existing vehicle; it is only used for new vehicles. There is no cost associated with the creation of a concept. Costs are only incurred once the concept is move into development. To create a concept, click the [Add a New Concept] button, select the vehicle class and specifications, and click the [Save] button. Once created, you will get feedback from R&D regarding the expected unit cost (at 100,000 units of production), the overall cost of the development project if you decide to move it from concept to development, and the number of years required for development.

Before deciding whether to further develop the concept (expensive!), you may want to see what your target market(s) think of the potential vehicle. You may do this using the TOOLS: Concept Tests. Please review the description of the tool elsewhere in this guide for details on how to run and interpret concept tests. Based on the results from the concept testing process, you may decide to change the concept. There is no additional expense to modify a concept at this stage. Therefore, get it right before moving ahead to the product development stage. Once you are satisfied with your concept and have decided it is worth the investment to put it into development, click the build button (to the right of the concept) which will move the concept into development and occupy one of your development centers for two or three years (depending on the length of the project).

Important: You must move a product from the concept stage into the development center; otherwise the product will never come to market.

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When you move a concept into development, you will be asked to name the project. This will ultimately become the name of your product in the market and is limited to 12 characters. The product name has no impact on the sales of your product, although civility is appreciated in playing the game. You may choose to cancel development at any time if you change your mind about the viability of the project. Remember that development centers are limited, and product development is a time-consuming and costly process, so choose wisely. Analysis The Analysis button provides a graphical view of past, present, and future use of development centers to aid with product development planning. Development centers in StratSim are among a firm's most valuable resources for strategic differentiation.

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Marketing MARKETING decisions consist of corporate marketing decisions and vehicle product mix decisions. The marketing function is also responsible for product sales forecasts for the coming year. These forecasts will be used in generating Pro Forma results. Decisions: Corporate Marketing Corporate marketing decisions are concerned with your firm's overall corporate image and message. Corporate advertising funds are allocated on a regional basis, helping to create awareness and preference for your firm, while also providing advertising support for your dealerships. You may select an overall corporate image Ad Theme. Social Media expenditures help stimulate interest in your firm's new and future product offerings, allowing you to target particular consumer segments via various social media vehicles. Direct Marketing funds target particular consumer segments, for example, postcards and emails telling them about dealership special promotions. Decisions: Product Marketing Product marketing decisions are the marketing mix decisions for each vehicle in your product line: price (MSRP), dealer discount, advertising budget and theme, promotional budget, and sales forecast (used in the pro-forma and analysis. MSRP is important because it sets price expectations in the mind of the consumer (positioning) and is the basis for setting your firm's actual revenues after dealer discounts are taken. For example, if MSRP is $20,000 and dealer discount is 10%, your actual revenues will be $20,000 x (1 – 0.10) = $18,000. Typically, the retail price (what the customer pays) for the vehicle will be between the price to the dealer ($18,000) and the MSRP ($20,000), and will vary depending on promotional programs, demand / inventory, target markets, etc. Product advertising and advertising theme play an important role in establishing vehicle awareness and shaping customers' perceptions of products. The majority of the advertising budget is spent on media buys, with the remainder on creative input and theme, and serves three primary purposes in StratSim: 1) Creates general awareness for the vehicle and establishes brand/product identity:

Whether or not the consumer knows the product name and its general positioning in the market.

2) Creates top-of-mind awareness: Loosely interpreted as a "share of voice" measure. For example, if consumers are asked to name a utility vehicle, the utility vehicle(s) they are most likely to mention have the greatest awareness and share of voice.

3) Establishes advertising message content: A vehicle aspect that is emphasized in advertising (interior, styling, safety, quality or performance). Match your product's ad theme with what

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is most important to the target customer(s) and that represents that vehicle's competitive advantage.

Promotion budget is used for special dealer or consumer promotions, such as below market financing rates, consumer rebates (additional price discounts), and dealer incentives (i.e., additional dealer discount if certain sales goals are met). Some of the promotional budget will also be used to generate awareness through product brochures, mailings, contests, etc. Check the Export Only—sometimes called Remove From Market—checkbox to stop selling a vehicle to consumers. If you are discontinuing a vehicle, you may wish to sell off remaining inventory before taking the vehicle off the market.

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Analysis The Marketing analysis projects your company product line’s contribution using your decisions and your forecast, providing insight into price and volume options. You may want to use the TOOLS: Test Market to learn more about the sensitivity of price, advertising, and promotion changes on your sales volume. These projected contributions include any export sales and are displayed on both an overall and per unit basis.

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Distribution Decisions Enter dealership management decisions, such as opening or closing dealerships on a regional basis and setting an overall dealership training and support budget. It takes one year to build / staff a new dealership or close an old one. Not having enough dealerships can leave markets uncovered, but having too many dealerships can lead to poor results due to overly competitive pricing and sales being spread thin. For each region, enter a change in the number of dealerships as a positive or a negative number. The maximum allowable change is 10% of your current total number of dealerships. So, if you have 600 dealerships, and you add 30 in one region and decrease by 30 in another region, you have reached your maximum allowable change (of 60 in the example). Coverage (dealerships in a region / sales areas in a region or full coverage) is calculated in two places. One with the scheduled change (dealerships added in the previous period) as well as with the current decisions. Training and Support: These expenditures are spread equally across all dealerships. The allocation of this resource is targeted to improve the experience the customers will have at the dealership in the long run.

NOTE: It takes 1 year to open or close a dealership. For example, if you make the decision to add dealerships in the initial period, it will not impact results until the results are generated for period 2. Pending dealership openings and closings will appear on the "Sched. Change" line.

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Analysis This screen provides further insight into the performance of your dealer network, including dealer coverage and financial performance by region, planned openings, sales and support per dealer, and dealer ratings. Full coverage: The number of sales areas in each region. Thus, coverage of 45% would imply that 45% of the sales areas are covered in a particular region by dealerships. Gross/Dealer: The average amount of money (gross) a dealer in a region has to operate their business. This amount equals the difference between the dealer invoice (what the dealer pays for the vehicle) and the actual retail price for all vehicles sold in their dealership. These are, in effect, the revenues for the dealership. The more revenues for the dealership, the better salespeople and support staff they can hire, the more they can reinvest in their facilities, etc. Thus, the gross/dealer amount is a good indicator of their success as a business, which, along with training and support, will likely translate into higher dealer ratings. Dealer Rating: Customer satisfaction index from a leading market research company (range 1– 100, with 100 corresponding to highest satisfaction). Dealer ratings provide insight into the success of dealerships. The success and coverage of your dealerships is an important aspect of your firm's overall success. Your firm should think of your dealership network as a key strategic partner who shares in your success. Generally, the more successful your dealerships are, the more successful you will be, and vice versa. Unit Sales: Displays vehicle sales at the product level by region. Differences by region may be due to underlying demand overall, demand for a particular type of vehicle, differences in distribution, and differences in competitor intensity. You may access this same information on your competitors under the COMPETITION: Distribution menu.

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Importing & Exporting (Instructor Selected Option) Part of the international component of StratSim, the IMPORTING & EXPORTING page allows you to source existing vehicles from firms in other regions for import to the domestic region, and it allows you to sell your vehicles to foreign firms. Importing You can choose up to four vehicles to import from a list of all vehicles available for import. The list includes the source, attributes, and base cost per unit for each vehicle. The base cost is unit cost in domestic currency for a purchase of 100,000 units, including shipping and tariffs. A firm can import from the Atlantic and Pacific regions. There are several computer-run firms in each region to choose from, and each firm produces multiple vehicles. Thus, there are many potential vehicles to choose from, each with different characteristics and costs. To create a new import agreement, select the vehicle your firm has chosen; enter the number of units, in thousands, you’d like to order; and enter a name for the vehicle to sell under. Remember to enter marketing decisions for a newly-imported vehicle. Note that the same vehicle may be imported by multiple firms under different names. After saving, you’ll see the actual cost you’ll pay per vehicle based on the number you’re purchasing. The cost is in domestic currency and includes shipping and tariffs. You can change the status of an agreement to “cancel” if you don’t want it to go into effect for the next period. Import agreements are automatically renewed each period unless you cancel them. At any point you may change the number of units requested in an agreement. Current inventory of imported vehicles is listed on the MANUFACTURING page.

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While importing a vehicle from another firm, you may develop your own platform to bring production of the vehicle in-house. Imported vehicles show up on the bottom of the PRODUCT DEVELOPMENT page as transferrable products. You can create a development project for them in much the same way as you would create a project for a concept. When a project is ready, decisions for the imported vehicle will be transferred to the newly developed platform, and the import agreement will be terminated.

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Exporting You can sell into international markets by exporting to a firm that has agreed to sell your automobiles under its name. The exporting tab allows you to manage your export agreements and shows you the vehicles that are currently being sold by firms in the Atlantic and Pacific regions with their specifications, unit sales, and MSRPs. You can create up to four export agreements with computer-run firms in the Atlantic and Pacific regions. To get started, enter your desired terms for the agreement: the foreign firm you’d like to sell to, the vehicle you’d like to sell, and the price per vehicle. The price you enter is your desired revenue per vehicle. The foreign firms are responsible for shipping and tariffs for any vehicles they import. Once you save, you will immediately see the foreign firm’s response in your Active Agreements: Accepted or Rejected. An accepted agreement shows the number of units the firm will buy at the price you offered. Make sure you have accounted for accepted export agreements in your manufacturing decisions by checking your pro-forma inventory analysis. You may renegotiate the price on an accepted agreement to try for better terms, and you may offer a different price on a rejected agreement to see if you can get it accepted. To do so, click the price on the agreement. Whether the agreement is accepted or not, you can only make a total of three price offers on it; that is, after you create an agreement, you have two more chances to change the price. If your third offer is rejected, you have to wait until the next period to try again with that firm and vehicle—even if previous offers had been accepted. Change the status of an agreement to “cancel” if you do not want it to go into effect or to remove a rejected “agreement” to make room for others. You can change the status to “restore” for a cancelled agreement to make a new offer on it and make it active again. If you’ve used up all your offers on an agreement, you will not be able to make it active again. So, if you have an agreement accepted on your final offer and then cancel it, you will have to wait until the following period to make the agreement active again. Each vehicle can only have one active agreement in a region, so you can only have as many agreements in a region as you have autos. Each foreign firm will make a maximum of one agreement for each vehicle class. Therefore if you want to export in a period, you may wish to make that decision early so that you can establish agreements before your competitors potentially establish agreements with the same foreign firms and vehicle classes as you were planning. When the simulation advances, sales from accepted export agreements will be reflected in your reports. Foreign and domestic sales are listed separately on the Product Contribution report, but they are combined on other reports, such as the Income Statement. Export agreements last only one simulated year. Change the price on an agreement with the “Negotiating Renewal” status to make an offer for another year. You don’t get any special status with a foreign firm because they

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had accepted an agreement with you in the past; if you are slow to renew, it is possible that a competitor will take your place.

Manufacturing Use the MANUFACTURING menu to enter decisions for product line production and overall firm capacity. The decisions and analysis screens provide supportive information regarding previous sales, inventory levels, and projections based on previous results, your decisions, and your forecasts. Based on your decisions, you may incur retooling, over-capacity charges, and / or the costs associated with building new capacity, all of which will be displayed here. Analyze your manufacturing process including scheduled product line planned production, flexible production, and overall plant capacity.

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Decisions: Production At the product level, there are two manufacturing decisions to be made: Scheduled (or Planned) Production and flexible production. Previous sales and current inventory levels are noted to help in your planning process, as are retooling costs, if applicable. Flexible production increases or decreases production by up to 10% to meet demand if the box is enabled. In general, the car industry aims to have 30–60 days of inventory available, but may have less if a firm is planning to upgrade or discontinue a vehicle. NOTE: when upgrading a vehicle, the current inventory will not be sold in the market, but instead will be written off at a loss to the company. By default, the Flexible Production checkbox is enabled. Flexible Production will not change production if inventory levels are projected to be between 0 and 120 days. However, if anticipated demand is greater than supply, the simulation will attempt to make up the difference by increasing production up to 10%. If anticipated supply is greater than 120 days, the simulation will reduce production by up to 10% in an attempt to limit inventory to 120 days. Since Flex Production is based on anticipated, rather than actual, supply and demand, it is possible for production to flex too much or not enough. If the Flexible Production checkbox is disabled, your firm will produce exactly what you have entered in the Scheduled Production field. Note: If the sum of all production (including flexible) exceeds capacity, you will be charged any over-capacity charges that apply. The over-capacity charge represents running extra shifts and paying overtime. Retooling costs are based on new platforms or increases in the production of an existing model, where existing capacity needs to be changed from one model to another. Thus, careful planning with regard to forecasting demand and production helps keep retooling costs lower. Decisions: Capacity To build or sell off overall firm capacity, enter the change in capacity (positive or negative). A capacity increase takes one year to build and cannot exceed 50% of the current capacity. The cost of the increased capacity is depreciated over ten years. The estimated cost of an additional 100,000 units of production is displayed, though you are not restricted to blocks of 100,000 units. The additional capacity becomes available for production decisions the following period. You may decrease capacity by entering a negative number. This sells off the least efficient plant capacity at 50% of remaining book value (if any). Increases and decreases are limited to 50% of your current capacity. Alternatively, you may choose to produce over capacity at a charge dependent upon the number of units produced beyond the firm's base capacity. This value is shown in the plant capacity section of the screen as "Over-capacity Charge ($M)".

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Offshore Plants Depending on how your instructor has chosen to configure the simulation, you may be able to produce vehicles offshore. Enabling the “Build” checkbox under the Pacific or Atlantic headings and entering the initial capacity you’d like to build will start a new plant in the corresponding region. The timeline and limit for capacity changes are the same for offshore plants as they are domestic ones. The initial capacity for each of the offshore plants may be as few as 50 thousand and as many as 1 million vehicles per year. Click the region name in the vehicle production decisions to change the region in which the vehicle is produced. You can choose to transfer production to a plant the period after you choose to open it. A vehicle can only be produced in one plant at a time. Your firm must decide the best single location for manufacturing each vehicle. If production exceeds capacity for a plant, you will incur expenses for running over capacity. You will incur retooling costs when you switch plants, even if you do not change production levels.

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Analysis The top half of the screen shows results from the most recent period; the bottom projects inventory levels based on your current decisions and forecasts. "Days inventory" is an estimate of the number of days of inventory available at year-end based on yearly sales; derived by the formula (365 x units inventory / sales). Generally, auto companies aim for approximately 30 days of inventory, but this may vary based upon development / upgrade plans for a particular vehicle. In the Comment column you may see, for example, a note about a new or upgraded product or if sales have exceeded planned production.

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You may find this same information on your competitors under the COMPETITION: Manufacturing menu.

Financing Decisions The financing decision screen is for all decisions related to the financial aspect of managing your firm, with a particular focus on cash flow and shareholder equity. You may select alternative financial instruments to raise funds, choose to invest extra cash in CDs, issue dividends to shareholders, and potentially buy back stock or call long-term bonds. Often, these decisions will be made after you have used the pro-forma [Analysis] to forecast your cash flow and financing needs. All values are entered in millions; thus, 2000 equals $2 Billion.

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Cash: Current Cash Balance represents funds currently available for investment. Cash may be invested in a 1-year CD to earn interest. Stock: Issuing stock is one method of raising cash for the company, however issuing additional shares may dilute shareholder value. If stock buy-back is enabled, cash may be used to repurchase up to 20% of the outstanding shares by entering a negative number. Enter shareholder dividend amount, should you choose to offer a dividend. The shares outstanding will remain constant unless your team chooses to sell or buy back stock. Debt: Short-Term Debt represents a revolving line of credit at variable interest rates that is automatically issued if the firm runs out of cash. Reducing your short-term debt is a decision that you must make in the context of having sufficient cash available. Long-Term Debt bonds with a term of 10 years have lower interest rates than short-term loans. Bonds are eligible to be called after 3 years, but do not have to be. An interest penalty of 1 year is applied when they are called. Bonds must be paid off in full if called. No partial calls are allowed. Bond rating will vary based on the financial position of your company. Short- and long-term interest rates will vary based on your bond rating and general interest rates. Bonds are rated from D (lowest) to AAA (highest), where higher ratings correspond to lower interest rates. If your bond rating improves, the interest rate the market requires from your debt issues will decrease, all other things being equal. Analysis Results shown in the FINANCING: ANALYSIS reflect your decision inputs and projections from the current period using the format of the Cash Flow Statement, but adding the starting and projected balance in the cash account from the balance sheet. Review this report carefully to assess and forecast your cash flow and financing needs for the coming period.

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Special Decisions (Instructor Selected Option) If your instructor chooses, you may be faced with special decisions based on "incidents". Generally, there is no correct answer as it often depends on your firm’s particular situation as to what the best option would be. Some decisions have financial implications, others don’t. A special decision is a required option – you must select one from the list of options available in that period. The full incident description will be shown when you select the Special Decision menu choice. There is also a short video related to the incident. Feedback on your choice will be displayed under Industry News.

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Decision Summary The DECISION SUMAMRY screen provides a summary of all your decisions for the current period. View this report at the end of your decision process and before the decision deadline, making sure all choices have been entered correctly. With the exception of the purchase of market research or tools, all decisions for the period can be changed until the simulation is advanced. After the simulation has been advanced, you will not be able to correct any input errors, so take the time to double check your entries before the deadline. You may also want to print out a copy. Select a different period in the top toolbar to view previous period decisions. When the simulation has been advanced to the next period, your course website and the simulation interface will be updated with the latest results; refresh your browser window to view the updated results. The simulation will now be in the next period (reflected at the top of the StratSim window). Timeline The TIMELINE displays important events during the simulation related to decisions your company makes. The timeline may highlight dealership, production, development, manufacturing, and, if enabled, international decisions.

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Pro-Forma PRO-FORMA uses your decisions and product forecasts to project inventory, income statement, balance sheet, cash flow, and product contribution for the upcoming year. Estimating the financial implications of decisions is an important part of the decision process. If the estimated values do not meet your expectations, you may want to reconsider your decisions or forecasts (or possibly, your expectations). Forecast Start the Pro-Forma process by entering your forecasts for each product. You may have done this during the decision process, but you may update those values here. The default forecasts are the sales during the prior year. Use the Sales Forecast links on this report to enter a forecast for each product. The forecasts represent your sales estimate (in units) for the consumer market for the coming year. When setting these forecasts, consider factors such as changes in your product (upgrades), price (MSRP or discounts), marketing support (advertising and promotion), expected demand, and, of course, the competition. Additionally, review any qualifying direct sales. Once forecasts have been entered, you can view the pro-forma Product Inventory report that calculates your projected inventory and retooling costs (if any), and Product Contribution report. All pro-forma reports are based on your forecasts and production levels.

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Note: These values are derived solely from your decisions and your forecasts; actual results will differ from the figures displayed here after the simulation is advanced. The

pro-forma is for planning purposes only and has no actual impact on outcomes. Reports The Pro-Forma analysis provides five projection reports: Product Inventory, Income Statement, Balance Sheet, Cash Flow and Production Contribution. These reports parallel the ones under the Company menu but are based upon your forecasts and inputs. Please see those menus for a more complete description of the content. Select the Reports tab to view the available reports. Reports: Product Inventory The inventory report levels on this report may be used to check planned production volume decision for the coming year. This report uses product sales forecasts, existing inventory (taking into consideration upgrades), and planned production volume to predict inventory levels for the upcoming year. Good forecasts are key to making accurate production decisions.

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Reports: Income Statement The PRO-FORMA: Income Statement report shows projected overall financial results for the upcoming year, based upon your current decisions. Click a line category link on this page to view detail of the charges that comprise the total.

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Reports: Balance Sheet The PRO-FORMA: Balance Sheet report shows projected asset and liability account balances for the upcoming year, based upon your decision inputs and forecasts this period.

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Reports: Cash Flow The CASH FLOW statement shows the sources and uses of the firm's cash. Changes in the amount of cash in the firm can be calculated based on cash flow from operating, investing, and financing activities. Line items may have different context modifiers as indicated by parenthesis. Using the Inventory line item as an example, a positive inventory cash flow amount indicates an increase in cash due to a decrease in inventory, and a negative inventory cash flow amount indicates a decrease in cash due to an increase in inventory. The modifier in parenthesis corresponds to the negative cash flow amount.

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Reports: Product Contribution The PRO-FORMA: Product Contribution report shows projected financial results at the product level, based on your current decision inputs and forecasts. This is an especially helpful report for setting prices relative to costs as it takes into account any product upgrades, production volume, and increases in material and labor costs for existing products and provides an accurate estimate of variable manufacturing costs for new products. The estimated contribution ($) and percent is valuable to compare across product lines.

Projections are provided overall (top) and on a per unit basis (bottom).

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Decision Rationale Enter the reasoning for your decisions on the My Rationale tab of this page. Your entries do not affect your performance in the simulation, though your instructor can see them and may choose to grade them. Unlike all the decisions in the simulation, each member of a team can enter his or her own decision rationale. To see what your teammates have entered, click the View Rationale tab.

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Appendix

STRATSIMMANAGEMENT

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Glossary

Advertising Any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor.

Advertising Message The point that an advertisement is trying to make, whether to build a particular image, stress the benefits of the product, compare with other brands, or maintain awareness.

Average Retail Price

The average price for a product charged by retailers, including both those dealerships with higher prices due to increased personal service, exclusive merchandise lines, attractive showroom atmosphere, special promotions, convenient location, or special services, and those who offer a no-frills, low-price approach.

Awareness The level of consumer familiarity with a product, brand name or advertisement.

Breakeven Analysis

An attempt to determine the volume of sales necessary (at various prices) for the manufacturer or merchant to cover his or her costs or to break even between revenue and costs. Breakeven analysis is useful to help set prices, estimate profit or loss potentials, and to help determine the discretionary costs that should be incurred.

Cannibalization Sales of a new product that take away sales of another product in the product line.

Capacity Utilization The extent to which the physical production ability of a plant facility is being used. Normally described as a percent of total capacity (i.e. 50% of capacity).

Channel of Distribution Any firm or individual who participates in the flow of goods and services as they move from producer to ultimate user (consumer or industrial).

Competitive Analysis The process of studying other companies who are vying to satisfy similar consumer needs. This includes analyzing competitors' strategy, product, pricing and channels of distribution.

Consumer Customer The intersection of a consumer segment and a preferred vehicle class. For example, 1E identifies those Value Seekers (1) who prefer an Economy class vehicle (E).

Dealership The retail distribution outlet where consumers purchase the product (automobiles).

Demand The desire of consumers for a certain product.

Fixed Costs

Financial obligations of a firm that remain at the same level no matter how many units of a product are produced and marketed. Amortization charges for capital equipment and plant, plus such charges as rent, executive salaries, property taxes, and insurance are examples.

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Gross Margin Total revenue less product manufacturing costs (materials, labor, plant and equipment).

Inflation A general rise in the prices that people must pay for goods and services.

Inventory Stock of a product that is already produced but not yet sold. Margin The difference between the price of a product and its per unit cost.

Market People or businesses with the potential interest, purchasing power, and willingness to spend the money to buy a product or service that satisfies a need.

Market Share The percentage of sales of a certain product in a market in relation to other products in that market (i.e. Brand X / Total sales in market).

Marketing The process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

Marketing Research The systematic and objective approach to the development and provision of information for marketing decision making.

Net Contribution The contribution after marketing less fixed costs. Net Income The profit remaining after all costs are subtracted from revenues.

Price The amount of money required for a product or brand in order for an exchange of ownership to take place.

Product Mix All of the individual products available from an organization.

Promotion The communication mechanism of marketing designed to inform and to persuade consumers to respond.

Quality

The totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. In the automobile industry, quality is sometimes more narrowly defined and measured by defects per 1000 cars or reliability.

Research and Development

Portion of a firm designated to research, analyze, and design products to meet consumer and market needs.

Segmentation The process of dividing large heterogeneous markets into smaller homogeneous segments of people of businesses with similar needs and / or responsiveness to marketing mix offerings.

Unit Sales The total volume of units sold by a manufacturer in a market.

Variable Costs Costs directly tied to production including direct labor and raw materials charges.

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Index

A accounts payable .................................................. 20, 62, 63 accumulated depreciation ................................................ 62 action plan .................................................................. 33, 34 advancing the simulation ................................................ 107 advertising .......................................... 12, 60, 61, 75, 80, 92

budget ................................................................... 12, 68 corporate ..................................................................... 12 message ..................................................................... 116 theme .................................................................... 12, 68

AEV vehicle ....................................................................... 26 alternatives ......................................................................... 4 Amazing Cars .......................................................... 6, 13, 15 appendix ............................................................................. 4 average retail price ................................................... 12, 116 awareness ..................................................... 12, 86, 92, 116

B balance sheet ........................................................ 14, 20, 62 base cost ........................................................................... 88 Best Motor Works ................................................... 6, 13, 15 bond rating ..................................................................... 105 bonds ............................................................ 18, 62, 63, 105 breakeven analysis .......................................................... 116

C cannibalization ................................................................ 116 capabilities and resources ................................................ 33 capacity ......................................................... 14, 63, 77, 101

change ....................................................................... 101 over-capacity charge ................................................. 101 utilization ............................................................. 77, 116

cash ..................................................................... 18, 63, 112 cash flow ........................................................................... 18 Cash Flow statement ................................................ 63, 112 cash rate ........................................................................... 64 channel ....................................................... See distribution competitive

advantage .............................................................. 22, 88 analysis ...................................................................... 116 arena ........................................................................... 35 mapping ....................................................................... 84

competitors ...................................................................... 84 concept

test............................................................................... 83 consumer

customers .................................................................. 116 consumer perceptions ...................................................... 12 contribution .............................................................. 60, 117

Cool Cars ................................................................ 6, 13, 15 cost

variable ....................................................................... 60 cost of goods sold (COGS) .................................... 19, 60, 80

impacts on................................................................... 41 cost structure ................................................................... 22 customer .................................................................... 74, 92

demand, effects on ..................................................... 36 needs........................................................................... 22

customer needs ................................................................ 15

D Dashboard ........................................................................ 57 dealer

coverage ...................................................................... 11 invoice ................................................................... 12, 60 markup ........................................................................ 12 rating ............................................................... 11, 76, 96 training ........................................................................ 76

dealership ................................................ 13, 50, 62, 95, 116 debt .................................................................................. 80

long-term .................................................................... 62 decision analysis

decision review alerts ...................................................................... 55

pro-forma .................................................................. 108 decisions ............................................................. 22, 88, 109

concept creation ......................................................... 90 pro-forma, cash flow ................................................... 32 technology .................................................................. 88

demand .......................................................14, 78, 101, 116 depreciation ......................................................... 62, 63, 80 development center ................................................... 49, 89 distribution ....................................................................... 76 dividend ............................................................................ 63 Driven Motor Co ........................................................... 6, 15 dynamic environment ...................................................... 32

E economic

conditions ................................................................... 64 outlook report ............................................................. 64

economy ........................................................................... 64 economy / familyvehicle .................................................. 10 economy vehicle .................................................... 8, 10, 24 Efficient Motors ...................................................... 6, 13, 15 engine ................................................................................. 7 enterprisers segment ....................................................... 29 equity ............................................................................... 20 experience curve effect .................................................... 42 external analysis ............................................................... 33

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F families segment ............................................................... 29 family / luxury vehicle ....................................................... 10 family vehicle .......................................................... 8, 10, 25 financial

implications ................................................................. 18 financial statements ......................................................... 62 Financial Statements

Cash Flow ............................................................. 63, 112 firm preference ........................................................... 75, 80 fixed costs ................................................................. 43, 116 flexible production ............................................................ 14 forecast ............................................................. 64, 108, 109

G gross margin ....................................................... 20, 61, 117 group decision making ...................................................... 32 growth-share matrix ......................................................... 86

H hidden costs ...................................................................... 44 high income segment........................................................ 29 horsepower (HP) ............................................................. 7, 8 hot buttons ................................................................. 11, 12

I ideals ................................................................................. 11 income .............................................................................. 79

from operations ..................................................... 61, 63 income statement ............................................................. 19 income taxes ..................................................................... 80 industry news ................................................................... 58 inflation ........................................................................... 117 interest

expense ..................................................... 18, 61, 63, 80 rates ..................................................................... 18, 105

interior ........................................................ 8, 12, 15, 74, 88 internal analysis ................................................................ 33 inventory ................................................. 14, 38, 62, 76, 117

days ..................................................................... 76, 101 write-offs ............................................................... 61, 80

investment ........................................................................ 15 alternatives .................................................................. 18 risk ............................................................................... 18

investments ........................................................ 15, 63, 112 plant ............................................................................ 63 technology ................................................................... 74

ISSQ ................................................................................... 35

L legends on graphs ............................................................. 69 luxury / sports vehicle ....................................................... 10 luxury vehicle .......................................................... 8, 10, 25

M major upgrade ............................................................ 17, 48 margin .................................. 13, 117, See also gross margin market ............................................................................ 117

growth rate ................................................................... 6 share ........................................................75, 80, 87, 117 share by region ........................................................... 67 value............................................................................ 80

market share .............................................................. 37, 86 effects on .................................................................... 37

marketing ....................................................................... 117 communications .......................................................... 75 expenditures ......................................................... 61, 80 research .................................................................... 117

minivan vehicle ...................................................... 8, 10, 27 minor upgrade ............................................................ 17, 47 mission and vision ............................................................ 33 MSRP .................................................................... 12, 68, 92

N naming your product ........................................................ 91 net contribution ............................................................... 86 net income ......................................................... 61, 62, 117 new class .......................................................................... 49 new customers ................................................................. 58 new platform ............................................................ 16, 101 new product ............................................................... 17, 48

O opportunities .................................................................... 22

P performance

vehicle ..................................................................... 7, 12 PESTEL .............................................................................. 33 plant maintenance ........................................................... 14 platform

development ............................................................... 74 portfolio analysis .............................................................. 87 position map .................................................................... 69 positioning ........................................................................ 69 price ................................................ 73, 117, See also MSRP pricing

impacts of ................................................................... 40 strategy ....................................................................... 41

product advertising .................................................................. 12 class ............................................................................. 24 contribution ................................................................ 59 detail report ................................................................ 73 development ......................................................... 15, 16 development ............................................................... 90 launch ......................................................................... 58 name ........................................................................... 91

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portfolio ....................................................................... 86 price ................................................................... 8, 12, 73 production ................................................................... 14

product mix ..................................................................... 117 production ............................................................ 14, 38, 77

capacity ....................................................................... 14 costs................................................................. 16, 80, 88 volume ......................................................................... 16

products report ................................................................. 73 profit equation .................................................................. 36 pro-forma

analysis ........................................................................ 44 promotion ........................ 11, 12, 60, 61, 68, 75, 80, 93, 117 public relations ..................................................... 12, 61, 80 purchase decision ....................................................... 11, 14

Q quality ........................................... 8, 12, 15, 73, 74, 88, 117

R R&D ..................................................................... 61, 80, 117 ranges ............................................................................... 69 receivables ........................................................................ 62 regions .............................................................................. 95 relative market share ........................................................ 87 retained earnings ........................................................ 20, 62 retooling ............................................................... 39, 62, 63 revenues ................................................................. 6, 19, 60

S safety .......................................................... 8, 12, 15, 74, 88 sales ...................................................................... 60, 64, 80

units ....................................................................... 60, 73 sales forecast .................................................................... 38 segmentation .................................................................. 117 segments..................................................................... 22, 29 short-term debt .......................................................... 62, 63 singles segment ................................................................ 29 size .................................................................................. 7, 8 sports vehicle .......................................................... 8, 10, 26 stock................................................................ 20, 62, 63, 80 stockouts

avoiding ....................................................................... 38 strategic

analysis ........................................................................ 34 planning ...................................................................... 32

strategy ............................................................................ 22 StratSim case ...................................................................... 4 styling .......................................................... 8, 12, 15, 74, 88 SWOT analysis .................................................................. 33

T taxes ........................................................................... 61, 80 technology

capabilities ...................................................... 15, 50, 74 maximum feasible limit ............................................... 74

test market ........................................................................ 85 timeline .......................................................................... 107

capacity increase ......................................................... 46 dealerships .................................................................. 50 development center.................................................... 49 major upgrade............................................................. 48 marketing mix ............................................................. 45 minor upgrade ............................................................ 47 new class ..................................................................... 49 new product ................................................................ 48 technology .................................................................. 50

training and support ............................................. 13, 76, 95 truck / sports vehicle ........................................................ 10 truck vehicle ........................................................... 8, 10, 28

U unit cost................................................................ 15, 16, 80 unit margin ....................................................................... 40 unit sales ........................................................................ 117 upgrade .................................................................... 16, 101

effects on cost ............................................................. 42 utility / sports vehicle ....................................................... 10 utility vehicle .......................................................... 8, 10, 27

V value seekers segment ..................................................... 29 variable costs ...................................................... 13, 80, 117 vehicle

attributes .......................................................... 7, 73, 88 classes ..................................................................... 9, 24 names...................................................................... 8, 73