2. If Company well managed & you make right decisions…
Production #’s
Plant Utilization=150%+
Turnover ratio 1+ indicates no idle assets
Inventories= 1-90 days
Marketing
Customer satisfaction=40+
Awareness=80%
Accessibility=80%+
Balance Sheet
Current ratio= 2-2.5
Leverage=
Sales/Current assets= 3-5
Income Statement
Contribution Margin= 30%+
ROS=5%+

4. DECISION GUIDES… BUSINESS PLAN GUIDELINE Marketing + R&D-
Page 1: Mission & Vision Statements –
 SECTION I : SITUATION ANALYSIS
1.1: External Environment - Opportunities & Threats:
MARKET STRUCTURE
MARKET DEMAND
MARKET SEGMENT VALUE
MARKET SEGMENT DYNAMICS
 1.2: Internal Environment- Analysis & Evaluation of Company's Strengths & Weaknesses
Marketing Management
Production & HR Management 
Financial Management 
1.3: Situational Analysis Results: SWOT Analysis
   SECTION II: STRATEGY, OBJECTIVES & TACTICS
2.1: Select one of the Six Basic Strategies delineated in your Online Guide – Describe your Company's Growth & Competitive Strategy; be specific regarding any plans for new product development (What products? Which segments? What years?)
2.2: Functional Domains- Objectives & Tactics
Marketing + R&D-
Production & HR
Financial-
DECISION GUIDES…

5. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

6. Key Demand Consideration:
Key Capacity Consideration:
Overall market ~ 14%/yr
“Average” company should/could double - sales in 6 years

7. How effective will u b in building your Co’s asset base?
At outset should be spending ~$10-25M / round on plant improvement
By end should expand asset base to min $140M to $160M+

8. Rounds 6,7,8 should be most profitable
NET PROFITS $$
Year 1 $6 million
Year 2 $8 million
Year 3 $10 million
Year 4 $12 million
Year 5 $16 million
Year 6 $21 million
Year 7 $27 million
Year 8 $35 million
Rounds 6,7,8 should be most profitable

9. Which most often selected … but least preferable to do?
Things you can do w/ your $$$:
Pay off Debt
Invest in growth
Buy-back stock
Pay dividends

10. Reducing Leverage
Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments”
More debt eliminated the greater target you become for a takeover..
No reason not to maintain Co. Financial Structure that got you to position of high profitability…

11. Most Basic Principle Guiding Your Decisions:
will it Increase Demand for Product
Decrease Cost
of Mfgg Product

12. Increase Product Demand Driven by Effective Mgt of 4 P’s
Product Mgt.
Introduce new brands, Repositioning / killing old brands
Promotional Mgt.
Optimizing Segment & Media Vehicle budget allocations
Distribution Mgt.
Optimizing Outside & Inside Sales-force & segment allocations
Pricing-
Competitive pricing & Fine-tune A/R

13. Decrease Mfgg Costs People Plant Investments in HR,TQM & PI
Effective Mgt of two other P’s:
People
Investments in HR,TQM & PI
Plant
Investments in automation & capacity mgt.

14. Increase Demand
Driven by Effective Mgt of 4 P’s

15. Kill it- sell off capacity- reinvest recovered capital
Product Mgt. Options
For every product - 3 options
Improve it-
Reposition it
Kill it- sell off capacity- reinvest recovered capital
Reposition
Improve
Kill

16. Consequences: Improving a product…
Increase sales & market share
Con’s:
offering a better- price, design and/or higher awareness- accessibility- costs $$$
High Tech segments can take 2+ years-
Will increase SG&A budgets & squeeze margins…

17. Questions need to answer if plan on improving a product…
What are your limits -How much can you cut price? Increase R&D… Promotion… Sales Budget?
Competitor moves- improving existing brands in seg. and/or introducing new brands in seg.

18. Variation on Improving… Can Reposition
Can allow product to age gracefully and ride the life cycle
Can redirect trajectory of brand position into adjacent segment

19. Questions need to answer if plan on repositioning a product…
How long will it take?
Material & labor cost implications?
Impact on products in segment entering? Leaving?

20. In final analysis– You Could decide to Kill

21. Questions need to answer if plan on Killing a product…
How many products do you plan to have overall?
Going to add a replacement in this or another segment?
Kill immediately-or phase out?
Other options- Improve? Reposition?
How will competitors react?

22. Consequences: Killing a product…
1) Makes it difficult maintain Overall Market Share
Even if Niche strategy-should increase share in selected niche(s) to offset loss in abandoned segments…
Investors-like to see Co. maintain overall starting share….

23. Consequences: Killing a product…
If not replaced:
2) Hands over Market Share to competitors
3) Removes strategic opportunity for distribution $$ efficiencies….

24. Segment Consequences: Killing a product…
LOW TECH Segments:
Kill the Cash Cow
In opening years 2/3’s volume & profit from Low & traditional sectors
HIGH TECH Segments:
Difficult to re-enter, could take up to 3 years to launch new prdt.

25. Your & Your Competitors Product Mgt. Decisions
Impact Arenas
of Competition

26. Let’s assume……
LOW END: 0-1 product killed repositioned or introduced
TRADITIONAL: 3-6 repositioned from High…0-1 killed…1-2 introduced
SIZE: 0-1 killed, 0-1 repositioned to Traditional, 1-2 introduced
PERFORMANCE: 1-2 killed, 0-1 repositioned to Traditional, 0-1 introduced
HIGH: 1-3 killed or repositioned to Traditional, 1-3 new products arrive in rounds 2 or 3

27. Round 3- Forecast nature, magnitude & arena of Competition
LOW END: 6 products=rivalry unchanged
TRADITIONAL: 9 products, w/ 3 repositioned= increased competition
SIZE: 7 products, w/ 2 new= increased competition
PERFORMANCE: 4 products, w/ 1 new= reduced competition
HIGH: 6 products, w/ 2 new= increased competition 6 4 9 6 7

28. -Given Round 3 Scenario- How should adjust your production capacities?
Round 0-1st shift Capacity
Round 3-Fair/Equal Share
Traditional
1800
1068
Low End
1400
2081
High End
900
668
Performance
600
823
Size
469

29. Optimal levels of capacity?

30. Most Basic Principle Guiding Your Decisions:
will it Increase Demand for Product
Decrease Cost
of Mfgg Product

31. Optimal levels of automation?

32. Once have optimal levels of capacity– Need to have most efficient levels of production costs

33. How to have most efficient levels of production costs
Reduce Material costs
Proffer minimal/optimal level MTBF
TQM/Sustainability Initiatives
Process Management Initiatives
Reduce Labor costs
TQM & PI Initiatives
Increase automation
Invest in employee recruitment & training
Utilize 2nd shift
Increases length R&D on product line-–makes re-positioning take longer
Incur employee separation costs
w/ maximum expenditures can realize 18% improvement in productivity in 6 years! ?

34. Why run 2nd shift –when labor costs 50% higher?

35. Why run 2nd shift –when labor costs 50% higher?
Answer by using your proformas:
1- On production spreadsheet build at capacity- if have 1000 units – build 1000 units
2-On Marketing display- FORECAST 1000 UNITS
3.-ON Proforma Income statement- note NET MARGIN –
THE BIQ Q: If we double sales will we double our net margin?– Will we make less because labor costs are 50% higher for 2nd shift?

36. Why run 2nd shift –when labor costs 50% higher?
Answer by using your proformas:
1- On production spreadsheet double output-run full 2nd shift
2-On Marketing display- double forecast
3.-ON Proforma Income statement- NET MARGIN –will more than double
When run 1 shift- must pay all fixed costs- 2nd shift gets a free ride-only has to pay labor premium & Material costs

37. Now that that you are producing-- in the most efficient manner-- a “perfectly designed” product
need to make sure “maximum #” consumers are aware of it & can “easily” buy it…

38. Moving Product Message Weight & Media Planning
Breadth, Depth & Heft of Distribution Network
Optimal Pricing & Credit Terms

39. Advertising Budget Drives Awareness
New products are newsworthy events. The buzz creates 25% awareness at no cost.

40. Sales Budget Drives Access

41. Fine tuning your Promo, Sales & Pricing…

42. Promo Budget

43. Sales Budget Time Allocations
Decide on how many salespeople & Mfr Reps will have:
How much effort will be focused on market segments:
OUTSIDE sales-meet face-to-face (cost $120K/each)
INSIDE sales-works leads & operates website & customer support systems (cost $50K/each)
Distributors: push product (cost $100K/each)

44. Pricing / Credit terms
A/R Lag: (in days) is the time between customers receiving products & when they are expected to pay for ‘em
No credit - demand falls to~ 65% of normal.
At 30 days - demand is 92%.
At 60 days - demand is 98.5%
At 120 days - demand is 100%.
The longer the lag, the more your cash is tied up in receivables.

45. Made all the Right Decisions --product design, pricing, positioning, promotion, distribution… credit terms… production line capacity, automation, hiring training, TQM & PI…

46. IF Then Your Competitors produce a better product
&/or You produce too much of your “great” product IF
You’ll be left w/less revenue than anticipated PLUS production & inventory carrying costs that must be paid..
Then

47. You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs.... IF
Then
Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment

48. Maintain Adequate working capital & cash reserves
In order to:
Need to:
Avoid “Big AL” & a Liquidity Crisis-
Maintain Adequate working capital & cash reserves
Have realistic/ accurate sales forecasts

49. Quick N’ Dirty
Consumer Pref’s
Best / Worst Case

50. Estimate FAIR & EARNED Share
2 Q’s:
What will the average product sell in the segment next round?
To what degree is your product above or below average- on consumers'’ buying criteria?

51. 1 2 3 4 EARNED Share - Sales Forecast
Determine industry demand next round.
Estimate # products that will be in segment.
Divide total industry demand by the number of products= FAIR SHARE
Your product’s EARNED demand can be between ½ and 2X the average product’s demand.
Compare your product with competing products.
Factors include design, awareness, accessibility, and planned mid-year revisions.
Examine industry capacities, and the capacities of the “best” products.
Can products meet the demand they generate?

52. #2 Forecast by Consumer Pref’s

53. Forecast off Customer Survey Scores

54. For Example-in Traditional segment everyone begins w/ 13% market share
Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.)
Initial round demand can vary +/- 25%
Later rounds best case/worst case vary ~~~~ 10-15%
For Example-in Traditional segment everyone begins w/ 13% market share

55. After 1st Year/Round- Can see demand spread

56. Baker 43 1758 units Able 40 1598 Fast 36 1560 Eat 1492 Cake 42 Daze 26
R#1 Dec Survey score
% of 223
Predicted sales R#2
Actual Sales R#2
Baker 43
19%
1827 units
1758 units
Able 40
18%
1731
1598
Fast 36
16%
1339
1560
Eat
1539
1492
Cake 42
1827
Daze 26
12%
1154
1045
Total=223

57. R#2
R#1 Survey score 43 40 36 42 26 2 1

58. CASE
CASE

59. BIG INVENTORY/ little cash
Worst Case:
BIG INVENTORY/ little cash
Best case:
Lots of CASH / little Inventory

60. Enter WORSE case- in “your sales forecast” on marketing spreadsheet
Enter BEST case- in “production schedule” on production spreadsheet
Spread show up as inventory on proforma BALANCE SHEET

61. In WORSE CASE: You have lots of Inventory
& little or no Cash.
$0.00

62. In WORSE CASE: You have lots of Inventory
& thus need to drive your cash position to the black…
$0.00

63. To adjust your cash position --
If you are cash poor, issue Stock /Bonds - or consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.

64. Important Considerations re: BEST-WORST Scenario Analyses
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL

65. Important Considerations re: BEST-WORST Scenario Analyses
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest or depreciation) already covered
Thus, any additional sales would only incur variable (production) costs

66. For example,
If your annual sales were $120M, in one month you’d sell $10M.
If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.
This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.

67. BIG INVENTORY/ no cash– risk seeing Big Al
How Big is your Slinky?
Worst Case:
BIG INVENTORY/ no cash– risk seeing Big Al
Best case:
Lots of CASH / no Inventory -you risk stockout

68. Determining A Reasonable Spread
Want to avoid generating an ultra Conservative Worst case scenario …matched w/ an ultra Optimistic Best case scenario
Should be able to sell excess inventory in ~betw. 6 & 16 weeks
Any less -- risk a visit from Big Al
Any more –- would require major screw-up from competition

69. Take your total inventory costs
How to measure your slinky slack--
Take your total inventory costs
$23,900M

70. Risk ~9weeks of Inventory to avoid stockout
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid stockout

71. Tutorials: Forecasting & Developing a Unit Sales Forecast
Guidelines Re: Sales Forecasting

72. One more thing to think about
What is the Relationship between My Strategy & Success Measures
One more thing to think about

73. Success Measures Strategy
Cumulative Profits
Ending Market Share
ROS
Asset Turnover
ROA
ROE
Ending Stock Price
Market Cap.
Performance Measures- Defined
Performance Measures-Dynamics

74. Diff Strategies Play into Different Success Measures
Cost Strategy = higher leverage/more investment/ more assets/more debt/ less equity
Focused Strategies should operate more effectively & have overall less sales
Profit MS
SP & MC
ROE
pf/e
ROS
pf/s AT
s/a
ROA
pf/a
BCL
L=2-3 X
Cost- Niche & PLC
B-Diff L=1.5-2
Niche-PLCDiff
All Segments= more sales & thus enable greater Cum. profit & overall market share
Differentiation Strategy =lower leverage/less investment/ less assets

75. Select Success Measures & Determine Relative Weightings
Need to enter weightings – prior to round-1

76. This week’s assignment:
1) Draft- Financial Objectives & Tactics
2) Draft- Mission & Vision Statements