WELCOME TO CAPSTONE BUSINESS SIMULATION

The University of Texas at Arlington Professor Jeffrey E. McGee The University of Texas at Arlington

Objectives Demonstrate effectiveness of multi-discipline teams working together. Use strategic thinking to an advantage. Test your business acumen. Understand overall interaction and impact of various parts of a business on one another. Grow an awareness of competition. Take away practical know-how to improve the effectiveness of your business.

Why Simulate Risk Free View Alternative Strategies Enjoyable Compresses Time (1 Round=1Year) Selectivity <> Integration

SENSOR INDUSTRY OVERVIEW

The Marketplace Customers (OEMs) need sensors for their products Low Tech Initially one segment, now breaking into two Very different customer demands between the two segments High Tech Diversification in the use and utility of the sensors

The Marketplace In our industry we track the changing customer demand on a perceptual map Low Tech High Tech Over 8 years the customers will demand much faster and smaller sensors Market Segments will continue to diverge

not giving me what I want Low Tech Customers You’re not giving me what I want “I want these sensors to be cheap” “I want them to have been around for a while – no Beta Testing!” “They have to be moderately reliable.” “The technology doesn’t have to be cutting edge.”

And I’m not getting what I want! High Tech Customers And I’m not getting what I want! “These sensors have to be small, like micro, and fast” “I need them to be right out of R&D, I’m talking ZERO years on the market” “I’ll pay more to get what I want.” “I like a pretty high reliability, but it’s not that important.”

SENSOR INDUSTRY ANALYST PROJECT ONGOING GROWTH Sees the next 8 years as consistent growth. All market segments increase at a nice “clip,” according to market analyst. “I see the entire market growing at around 14% or 15% per year. The High Tech market alone will be growing at a whopping 20%.” I hope those companies out there are ready for that kind of expansion!”

COMPANY OVERVIEW

SEC ANNOUNCES BREAKUP OF MONOPLOY FOR IMMEDIATE RELEASE Christopher Cox, Chairman of the SEC, took dramatic action today by breaking up the monolithic corporation Sensors, Inc. In a statement to the press Chairman Donaldson outlined the reason and the outcome of this move. “We cannot allow monopolies of this sort to impact an entire industry!” stated Donaldson. “The customers that utilize these sensors are being held hostage. “Effective immediately Sensors, Inc will be dissolved into the Andrews, Baldwin, Chester, Digby, Erie and Ferris companies.”

The Competition 6 Companies $40 Million in Sales 1 Product Lines ANDREWS DIGBY 6 Companies $40 Million in Sales BALDWIN ERIE 1 Product Lines Closed Marketplace CHESTER FERRIS

SHAKE UP IN SENSOR INDUSTRY Company Fires Management Team After poor results, lackluster sales and angry customer reports, the Chairman of the Board of Directors has announced the immediate termination of the Management Team. “This is a black day for our company,” said Chairman Jeffrey E. McGee, “We need to hire a dynamic leadership group who will be able to take this company into the future!” “Due to this immediate need I have hired the Dream Team to start on January 1st. I expect to see great things from this Executive Team!

WELCOME TO YOUR NEW COMPANY!

Functional Areas Production R&D Finance Marketing

Research & Development Establish the specification of the products to meet customer demand Build the quality and reliability (MTBF) into the products Ensure the perceived age of the product meets customer demands Create new products to meet the changing marketplace “Our products are not well positioned in the marketplace.”

are not priced optimally. Marketing Set the price of our products in the marketplace Build customer awareness through promotion Establish a sales force and distribution channels Set the sales forecast for our products Set Credit Policies AR/AP “Our products are not priced optimally. And many of our customers don’t even know our product exists.”

“We are paying too much for labor costs. will run out of capacity to Production Purchase machinery to automate our facilities Buy or sell capacity of product lines Schedule production for each line Manage the majority of the company’s fixed assets Establish your workforce complement “We are paying too much for labor costs. Very soon we will run out of capacity to meet demand.”

Finance Acquire capital to fund capital expansions Issue Stock Short Term Debt Issue Long Term Bonds Issue dividend to our shareholders Balance our debt portfolio Manage our proformas “We have poor cash flow and substandard financial ratios. We have no financial policy statement.”

Proformas Balance Sheet Profit & Loss Cash Flow Financial Ratios A great management tool driven by forecasts and projections. Allows “What if” Scenarios by the company. Balance Sheet Profit & Loss Cash Flow Financial Ratios

Scoring the Game Select a minimum of two criteria to be measured by: ROE ROS ROA CUM PROFIT STOCK PRICE MARKET CAPITALIZATION ASSET TURNOVER MARKET SHARE Weight each selection.

RUNNING YOUR COMPANY THINGS TO DO ON AN ANNUAL BASIS

To Do List Establish business strategy for your company Analyze Capstone Courier to see industry results Make tactical decisions across each functional area (aligned to strategy!) Upload official results and confirm on the website Await results when Professor processes Rejoice in your superior capitalistic acumen Begin the process again by confirming alignment of your results with your company’s strategic goal.

Types of Business-Level Strategies Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

Five Generic Strategies Competitive Advantage Cost Uniqueness Cost Leadership Differentiation Broad target Integrated Cost Leadership/ Differentiation Competitive Scope Five Generic Strategies Business-Level Strategy (p. 141) Firms choose from among five business-level strategies (see Figure 5.1 in the text) to establish and defend their desired strategic position against rivals: • Cost leadership • Differentiation • Focused cost leadership • Focused differentiation • Integrated cost leadership/differentiation Examples of cost leadership and differentiation strategies are discussed on later slides. Narrow target Focused Cost Leadership Focused Differentiation

No Clearly Defined Strategy… MY FIRM HAS A COMPETITIVE ADVANTAGE MY FIRM HAS A COMPETITIVE ADVANTAGE STUCK IN THE MIDDLE 14

Strategy From where in the organization strategy should emerge? Michael Porter argues for a top-down view. Strategy is designed at the top of the organization, with the goal of positioning resources and building relationships in a unique way. Eric Banabeau says strategy should emerge from the bottom-up in a sort of dance with the marketplace, and that the goal of strategy should be to apply simple rules.

CAPSTONE STRATEGIES Strategies are declared in corporate mission statements Capstone firms may develop and execute any strategy (or none at all - though that isn’t advisable). Basic strategies include: Overall Cost Leader Cost Leader with Focus (Low Tech or Product Life-Cycle) Differentiator Differentiator with Focus (High-Tech or Product Life-Cycle) STRATEGY Mission Statement INDUSTRY AND MARKET ANALYSIS S.W.O.T Analysis Competitor Analysis Competitive Analysis PERFORMANCE ASSESSMENT Success Measurements Analyst Report Round Analysis - Star Summary FUNCTIONAL PLANNING R&D Marketing Production HR Finance TQM

Porter Curve ROI Market Share High Low High Extensive coverage on Porter’s theories of competitive advantage are easily located on the internet. Those theories in a Capstone® context are explained in a tutorial on the website. Low High Market Share

Porter Curve ROI Market Share High Low High Firms with High ROI / Low Overall Market Share would likely have a clearly defined focused strategy High Overall Market Share / High ROI firms would likely have a strong position in all segments –risky, but effective when executed properly High Market Share Low High

Porter Curve ROI Market Share High Low High Firms in the middle have a less definable identity, and a hard time competing. They might have a number of “sofa-bed” product lines: Not great sofas – not great beds. ROI Low High Market Share

Capstone Strategies The Situation Analysis generated an overview of the forces at work within the Capstone market place. Now you must decide how to use that information to gain a competitive advantage. There are many different approaches - all of which can be successful depending on how well they are implemented tactically.

OVERALL COST LEADER An overall cost leader will attempt to be the low-cost producer in every segment of the market. They will have good profit margins on all sales while keeping prices low for price-sensitive customers. Firm Profile: More likely to re-position products than introduce new ones to the market Capacity improvements are unlikely to be undertaken (may run overtime instead) Automation may be pursued to increase margins Investments will be financed with debt and/or stock issues Tend to spend less on promotion and sales Focus on Market Share, Profits, and Stock Price

COST LEADER WITH LOW-TECH FOCUS A low-tech focused cost leader seeks to dominate the price sensitive market segments. Their aim is to set prices below all competitors - and still be profitable. Firm Profile: Multiple product lines in the low-tech segments (Low & Traditional) Invest heavily in automation Spend heavily on advertising to cost sensitive customers (sales people have more than one product to pitch to prospects) Investments financed with debt and/or stock issues Focus on ROS, ROE, and Profits

COST LEADER WITH PRODUCT LIFE-CYCLE FOCUS A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise. Products will be allowed to age and change in appeal from high-tech, to traditional, and eventually low end buyers. Firm Profile: Minimum presence in “specialty” segments (Size & Performance) Low R&D spending (very little re-positioning & new product every 2-3 years) Invest in automation early in the product’s life-cycle High spending on promotion and sales Focus on ROE, ROS, and Profits

DIFFERENTIATOR A Differentiator will seek to create maximum awareness and brand equity. They want to be well known as makers of high quality/highly desirable products. Firm Profile: High R&D spending to keep products fresh Maintain a presence in all market segments Spend heavily on advertising and sales to create maximum awareness and accessibility Prices tend to be higher Focus on Market Share, Profits, and Stock Price

DIFFERENTIATOR WITH HIGH-TECH FOCUS A high-tech differentiator seeks to be known far and wide as the top producer of the best performing state-of-the-art products. Firm Profile: Multiple product lines in high-tech segments (High, Performance, and Size) Minimum focus in other segments High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually introduce new product lines and keep existing products fresh Unlikely to invest in increased automation or production capacity Focus on ROA, Asset Turnover, and ROE

DIFFERENTIATOR WITH PRODUCT LIFE-CYCLE FOCUS A product life-cycle differentiator seeks to be well-known as a top producer of good performing products in each of the targeted segments. Firm Profile: Multiple product lines in targeted segments (High, Traditional, and Low) Minimum focus in other segments High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually re-position product lines and keep products fresh Unlikely to invest in increased automation or production capacity Focus on ROA, Stock Price, and Asset Turnover

Today’s shift is tomorrow’s nightmare Strategies Evolve Today’s shift is tomorrow’s nightmare Poor tactics undermine a good strategy Good tactics can overcome a poor strategy

SUMMARY There is no "magic bullet," guaranteed winning strategy. Each simulation has a unique competitive dynamic. Successful firms will focus on planning, strategic alignment, teamwork, competitor analysis, and tactical adjustments.

Good Luck and Enjoy!