1. 1 MANECSIM A Business Simulation for Managerial Economics, Applied Microeconomics, and Pricing Courses Fernando Arellano, Ph.D.

2. 2 What is MANECSIM? ManecSim is a business simulation in which decisions are mostly related to topics covered in a managerial economics course or in courses covering demand analysis or pricing. ManecSim is a business simulation in which decisions are mostly related to topics covered in a managerial economics course or in courses covering demand analysis or pricing. The simulated firm manufactures three products with different demand and supply characteristics. The simulated firm manufactures three products with different demand and supply characteristics.

3. 3 What are other characteristics? Each simulated period represents one quarter. Each simulated period represents one quarter. Up to twelve quarters can be simulated. Up to twelve quarters can be simulated. Up to sixteen student teams can participate. Up to sixteen student teams can participate. In addition to financial statements and supplementary information, teams receive historical information on sales volumes, prices, GDP, CPI, and other macroeconomic variables. In addition to financial statements and supplementary information, teams receive historical information on sales volumes, prices, GDP, CPI, and other macroeconomic variables.

4. 4 What topics can be covered? –Demand analysis –Sales forecasting –Cost analysis –Pricing –Break-even analysis –Cash budgeting –Financial and operating leverage –Market structure

5. 5 What decisions can be made? In the marketing area: In the marketing area: –Pricing –Setting promotional expenditures –Setting customer service expenditures –Purchasing of information about the competition In addition, participants have to make market and firm sales forecasts for each product. In addition, participants have to make market and firm sales forecasts for each product.

6. 6 What decisions can be made? In the finance area: In the finance area: –Requesting 90-day loans. –Investing in 90-day certificates of deposit. –Distributing dividends.

7. 7 What decisions can be made? In the production area: In the production area: –Ordering production. –Selecting between two suppliers of raw material that offer different terms of payment.

8. 8 What are the variables? The following variables can be controlled in setting up the scenario for the simulation: The following variables can be controlled in setting up the scenario for the simulation: –Behavior of GDP, population, CPI, interest rates, unemployment, industrial production index, and house starts. –Income elasticities. –Price elasticities. –Promotion and customer service elasticities. –Population elasticities (to model tastes and preferences).

9. 9 What are the variables? The following variables can be controlled in setting up the firm at the beginning of the simulation: The following variables can be controlled in setting up the firm at the beginning of the simulation: –Capital structure –Cost structure of each product –Sales volumes and prices –Production, marketing and administrative costs –Profit margin per product and firm overall profitability

10. 10 What are the variables? The following variables affect MARKET demand in ManecSim: The following variables affect MARKET demand in ManecSim: –Market price (average price of all firms) –Income –Population –Tastes and preferences –Promotion expenditures

11. 11 What are the variables? The following variables affect FIRM demand in ManecSim: The following variables affect FIRM demand in ManecSim: –Firm price –Promotional expenditures –Customer services expenditures

12. 12 What are the variables? Firm performance is evaluated on the basis of product contribution margin, overall firm profitability, and sales forecast errors. Firm performance is evaluated on the basis of product contribution margin, overall firm profitability, and sales forecast errors.

13. 13 They learn to identify the different variables affecting market and firm demand. They learn to identify the different variables affecting market and firm demand. –To improve analysis and decision making process, number of decisions affecting demand are restricted at the beginning of the simulation. They learn to identify the degree to which different variables affect market and firm demand: They learn to identify the degree to which different variables affect market and firm demand: –Their decisions on pricing, promotion and customer services expenditures have different impact on market and firm demand. What do students learn?

14. 14 They value the importance of pricing: They value the importance of pricing: –When they decide on prices and observe their impact on sales. –When they set prices that are higher or lower than their competitors’ and consequently, decrease or increase their market share. What do students learn?

15. 15 They value the importance of other demand variables under the control of the firm: They value the importance of other demand variables under the control of the firm: –When they decide on promotion and customer services expenditures. –When they set expenditures on these variables that are higher or lower than their competitors’ and as result, combined with price, decrease or increase their market share. What do students learn?

16. 16 They calculate break-even points: They calculate break-even points: –When they want to determine their minimum prices or minimum production volumes. They identify and measure contribution margin: They identify and measure contribution margin: –When they calculate the contribution of each product to cover fixed costs and generate profits. They do profit and cost analysis: They do profit and cost analysis: –Before and after they make their decisions. What do students learn?

17. 17 They value the importance of accurate sales forecasts: They value the importance of accurate sales forecasts: –When they need to set production levels. –When they overestimate production and are left with inventory, incurring in storage cost. –When they underestimate production and lose sales, foregoing profits. What do students learn?

18. 18 They value the importance of accurate cash budgeting and improve their budgeting skills when they: They value the importance of accurate cash budgeting and improve their budgeting skills when they: –Do cash budgeting to determine their funding needs (or their excess cash). –When they underestimate or overestimate their funding needs and receive emergency funding at a penalty rate or sacrifice the opportunity cost of surplus cash. What do students learn?

19. 19 They can do regression analysis using the variables and values present in the simulation: They can do regression analysis using the variables and values present in the simulation: –When they want to establish the relationship between sales and variables affecting demand. –When they forecast sales They identify factors favoring price wars: They identify factors favoring price wars: –When they recognize cost structure and price elasticity as relevant variables. What do students learn?

20. 20 They recognize the difference between market structures: They recognize the difference between market structures: –When they set prices for two products that have oligopolistic markets and one that is a monopoly. –When they forecast sales at the market and firm levels and recognize the difficulty of forecasting sales in competitive markets. What do students learn?

21. 21 They apply the time value of money concept when they make the decision on whether to: They apply the time value of money concept when they make the decision on whether to: –Purchase raw material using cash or using a short-term loan from the bank or trade credit from the supplier. What do students learn?

22. 22 What do students learn? They value the importance of financial leverage: They value the importance of financial leverage: –When they request short-term loans, invest in short-term CDs, and distribute dividends

23. 23 What do students learn? They appreciate the importance of operating leverage when they: They appreciate the importance of operating leverage when they: –Observe different impact on profits when sales increase or decrease for each product. The three products have different cost structures and respond different to changes in price. The three products have different cost structures and respond different to changes in price.

24. 24 What do students learn? They practice reading and interpretation of financial statements when they: They practice reading and interpretation of financial statements when they: –Analyze the impact of their decisions on profits and other financial indicators.

25. 25 How are decisions scheduled? To accomplish the objectives presented before, decisions are scheduled in a way that precludes complexity at the beginning and allows for concentration on specific topics. The number of decisions allowed are sequentially increased quarter by quarter. To accomplish the objectives presented before, decisions are scheduled in a way that precludes complexity at the beginning and allows for concentration on specific topics. The number of decisions allowed are sequentially increased quarter by quarter.

26. 26 How are decisions scheduled? First decision: Participants are asked to forecast sales at the market and firm levels while maintaining the same prices and expenditures on promotion and customer service. First decision: Participants are asked to forecast sales at the market and firm levels while maintaining the same prices and expenditures on promotion and customer service. –Production orders and financing are automatic The purpose is to observe the effect of income, population, and tastes and preference on sales volumes. The purpose is to observe the effect of income, population, and tastes and preference on sales volumes. Their report will show their sales forecast errors at the market and firm levels. Their report will show their sales forecast errors at the market and firm levels.

27. 27 How are decisions scheduled? Second decision: participants are allowed to change prices. Second decision: participants are allowed to change prices. –Production orders and financing are still automatic. The purpose is to observe, besides the effect of income, population, tastes and preferences, the effect of market and firm price elasticities on each product. The purpose is to observe, besides the effect of income, population, tastes and preferences, the effect of market and firm price elasticities on each product. There is no competitive interaction in one of the products, which is a monopoly. There is no competitive interaction in one of the products, which is a monopoly.

28. 28 How are decisions scheduled? Third decision: Participants are permitted to set prices again. All other variables are constant. Third decision: Participants are permitted to set prices again. All other variables are constant. This allows them to observe again the effect of prices and give them the opportunity of correcting or fine-tuning their pricing decisions. This allows them to observe again the effect of prices and give them the opportunity of correcting or fine-tuning their pricing decisions. They still produce automatically what they will sell and automatically cover their funding needs. They still produce automatically what they will sell and automatically cover their funding needs.

29. 29 How are decisions scheduled? Fourth decision: in addition to setting prices, participants are permitted to change expenditures in promotion and customer service. Fourth decision: in addition to setting prices, participants are permitted to change expenditures in promotion and customer service. This allows them to observe the effect of promotion and customer service elasticities on sales volumes and on profits. This allows them to observe the effect of promotion and customer service elasticities on sales volumes and on profits. –Firms still have their Chief Operating Officer and their Chief Financial Officer taking care of production orders and funding needs.

30. 30 How are decisions scheduled? –The effectiveness of their pricing and promotional and customer service decisions will be expressed in their products’ contribution margin and in their firm overall profits.

31. 31 How are decisions scheduled? Fifth decision: The Chief Operating Officer resigned. Teams now have to make decisions on production orders. Fifth decision: The Chief Operating Officer resigned. Teams now have to make decisions on production orders. Firm profits will depend now not only on their pricing and promotional and customer service decisions, but also on the accuracy of their sales forecasts. Firm profits will depend now not only on their pricing and promotional and customer service decisions, but also on the accuracy of their sales forecasts. –Firms may either have excess inventory or inventory lock-outs with corresponding effects on profits.

32. 32 How are decisions scheduled? Sixth decision: The Chief Financial Officer also resigned. In addition to their previous decisions, participants are responsible for funding decisions. Sixth decision: The Chief Financial Officer also resigned. In addition to their previous decisions, participants are responsible for funding decisions. –Now, firm profits depend on the accuracy of their sales forecasts and their cash budgets.

33. 33 How are decisions scheduled? Seventh decision: Firms can select, for each product, raw materials from two different suppliers with different prices and term payments. Seventh decision: Firms can select, for each product, raw materials from two different suppliers with different prices and term payments. The purpose is to apply the time value of money concept. The purpose is to apply the time value of money concept. They have to decide between purchasing for cash or on credit. They have to decide between purchasing for cash or on credit.

34. 34 How are decisions scheduled? Eight decision: Firms can distribute dividends (if they have retained earnings). Eight decision: Firms can distribute dividends (if they have retained earnings). The purpose is to observe the impact of dividends on liquidity and profitability. The purpose is to observe the impact of dividends on liquidity and profitability. (Firms are not listed on the stock market so no stock price effect can be observed). (Firms are not listed on the stock market so no stock price effect can be observed). The distribution of dividends affects the capital structure of the firm. Thus, the effect of financial leverage can be also observed. The distribution of dividends affects the capital structure of the firm. Thus, the effect of financial leverage can be also observed.

35. 35 How are decisions scheduled? Ninth decision: All decisions are permitted. Ninth decision: All decisions are permitted. If a product was initially set with a high fixed cost and high firm price elasticity, a price war may be underway. If a product was initially set with a high fixed cost and high firm price elasticity, a price war may be underway. Up to twelve rounds of decisions can be made in ManecSim. Up to twelve rounds of decisions can be made in ManecSim. This decision schedule can be altered to accommodate the teaching objectives of the instructor. This decision schedule can be altered to accommodate the teaching objectives of the instructor.

36. 36 Summary Participants develop abilities and skills in: Participants develop abilities and skills in: –Demand analysis –Sales forecasting –Cost and profit analysis –Pricing –Cash budgeting They experience competition and the effect of different market structures on their pricing and forecasting decisions. They experience competition and the effect of different market structures on their pricing and forecasting decisions. They recognize the relationship between the areas of marketing, production, and finance, and the relationship between the income statement, the balance sheet, and the cash flow statement. They recognize the relationship between the areas of marketing, production, and finance, and the relationship between the income statement, the balance sheet, and the cash flow statement. They experience the effect of cost structure (operating leverage) and capital structure (financial leverage) on liquidity and profitability. They experience the effect of cost structure (operating leverage) and capital structure (financial leverage) on liquidity and profitability.