BUS4098 Week 3

Three-Year Plan

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Business Simulation

©2016 South University

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[Parent Lecture Name]

Three-Year Plan

After discussing the strategic groups in the footwear simulation, let's now look at how you will prepare a three-year plan for your firm. For this, you will be forecasting the demand for your product in the future. This is one of the most important things that firms do. Aligning demand with supply means that sales are not missed due to stockout and inventories do not pile up in the warehouse. However, making such predictions is quite challenging. Even after excluding unforeseen events that may impact demand, firms wrestle with the correct assumptions about what they know when making projections.

In the simulation, the software gives you good demand projections. These are comparable to the projections that many firms construct with the help of software they have for industries they understand well. In our simulation, the projections will vary due to factors such as the amount of advertising a firm does, the overall growth trends in the economy, and whether the firm has attempted to address all the major demand segments in the market. These represent one set of assumptions that you make every week while making decisions on the Demand Forecasting screen in the simulation.

The three-year planning software goes deeper into projecting future trends. The three-year planning module in the software is similar to the software many firms have constructed. If you look at the projections and try to forecast how those decisions will play out over time, you can see things in the three-year plan that a simple one-year forecast will not show. For example, you can see the impact of long-term decisions such as building a new plant capacity or acquiring celebrities. Importantly, you will see what type of financial statements the different choices will produce. Firms can and should use this tool for scenario and sensitivity analysis. It is a powerful tool for assessing the what-if of strategic choices and their implications for the future.

You discussed the importance of forecasting demand and the purpose of making a three-year plan in the simulation. Now let's look at how to make these projections and the importance of making accurate projections.

Instructions for Making the Three-Year Plan

The three-year planning tool is only as good as the assumptions you put into it. You will discover that you can make the projected results look good simply by making favorable assumptions. But if these assumptions are inaccurate, then the variance between the actual results and the pro forma projections will be dramatic and embarrassing. Also, your team will miss the opportunity to detect weaknesses in your strategy and fix them at an early stage. Conversely, making poor assumptions to avoid undesirable results is the equivalent of sweeping problems under the rug. It only looks good on the surface and at first glance.

When you carefully read through the information on the three-year plan on the simulation website, you will be scored on how accurately you predict the firm's actual performance over the next three years. In the real world, managers of public companies have to make projections or give guidance to the public all the time. Making errors in projections not only embarrasses the top-management team, but also causes the stock price to crash because investors feel that the managers do not know and understand their

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Business Simulation

©2016 South University

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industry well. Therefore, it is important that you and your teammates make realistic assumptions in the three-year plan. If the plan shows undesirable results, this is a good indication that strategic correction needs to be made now.

Your three-year plan is due at the same time as your Year 14 decision. Although you are not bound by the strategy you set out in the three-year plan, you will be held to the numbers you put into it as projected performance metrics.