1. Copyright 2006 Ernest R. Cadotte Introduction to Strategy and Business Policy

2. Copyright 2006 Ernest R. Cadotte Learning Strategy I listen, I forget. I see, I remember. I do, I understand. Old Chinese Proverb

3. Copyright 2006 Ernest R. Cadotte Learning Strategy Computer simulations are a form of combative training where participants pit their entrepreneurial business skills against those of formidable opponents under the watchful eye of a training coach.

4. Copyright 2006 Ernest R. Cadotte When we study one discipline at a time, we are like a bunch of blind people trying to understand what an elephant is. Please tell me what it is? It’s a snake. It’s a tree trunk. It’s a sheet of rawhide. It’s a steel tube.

5. Copyright 2006 Ernest R. Cadotte With business simulations, you can crawl all over and under the new venture to help you to see and understand the whole thing. It is an enterprise! Accounting Production Marketing Distribution Finance Human Resources

6. Copyright 2006 Ernest R. Cadotte Team of Experts Helped to Design a Very Realistic Learning Environment Harry Bruce – leadership, governance Joyce Russell – team work, human resources Jim Reeve – accounting, profit analysis Sarah Gardial & Bob Woodruff – customer value Jim Wansley – finance Dominique Garval – business strategy Ernie Cadotte – marketing Ken Gilbert – production processes Ivan Slimak – brand design, quality processes Tom Mentzer – supply chain

7. Copyright 2006 Ernest R. Cadotte Learning Strategy: Learn by Doing Participants learn about all aspects of strategic planning by managing a simulated new business venture. The Marketplace scenario follows the lifecycle of a new product. Business decisions are introduced as they become relevant in the evolution of the product and company.

8. Copyright 2006 Ernest R. Cadotte Mental Discipline & Business Culture Live and breathe strategic planning and management in a rapidly changing environment. Develop leadership, teamwork and interpersonal skills. Promote better decision making by learning to manage a totally integrated company, including the management of sales outlets, marketing, production, and human and financial resources.

9. Copyright 2006 Ernest R. Cadotte Mental Discipline & Business Culture Crystallize the financial implications of business decisions and how they flow to bottom-line performance. Facilitate learning of important business concepts, principles and ways of thinking.

10. Copyright 2006 Ernest R. Cadotte Mental Discipline & Business Culture Discover how important it is to use market data and competitive signals to adjust the strategic plan and more tightly focus business tactics. Build business confidence through knowledge and experience.

11. Copyright 2006 Ernest R. Cadotte How is the business simulation conducted? Teams are placed in a entrepreneurial scenario - starting up and running a new business venture. The opposition is played out by competing teams.

12. Copyright 2006 Ernest R. Cadotte Business Team Market Opponent Objective is to profitably capture a dominant market position

13. Copyright 2006 Ernest R. Cadotte Business Teams Each team member assumes a tactical area of responsibility. Marketing Finance Distribution Production Overall Leadership

14. Copyright 2006 Ernest R. Cadotte How conducted? Business team receives information on current situation. Current situation is evaluated, strategy formulated and tactics set in placed. Tactical decisions are fed into the Marketplace simulator, along with decisions of opponents. Results of decisions are fed back to business team.

15. Copyright 2006 Ernest R. Cadotte How conducted? The business team can acquire information on what is happening in the marketplace: –customer reaction to market decisions –competitor actions Current situation is evaluated, strategy formulated, and tactics set in place. Tactical decisions are again fed into the Marketplace simulator.

16. Copyright 2006 Ernest R. Cadotte Game Scenario You and your business partners have decided to enter the international microcomputer industry. The microcomputer industry is in its introductory stage of the product life cycle. Several other international new venture firms are entering the market at the same time.

17. Copyright 2006 Ernest R. Cadotte What are the pros and cons of each sales channel? You can setup an international Web Center for e-commerce, and/or four international sales offices.

18. Copyright 2006 Ernest R. Cadotte Market Segments (Market Structure) Price Performance Work Horse Traveler Mercedes

19. Copyright 2006 Ernest R. Cadotte Chronology of Events Q1: Organize the team, name the company, analyze market information, establish strategic direction and set up shop (design brands, open a sales office and/or an international web center and build a factory).

20. Copyright 2006 Ernest R. Cadotte Chronology of Events Q2: Test-market brands, prices, ad copy, media campaigns, sales staffing and internet tactics. Determine compensation package for employees and production schedule for each brand. Q3: Study end user feedback, competitive tactics, employee productivity, factory operations, and financial performance and make adjustments to strategy and tactics.

21. Copyright 2006 Ernest R. Cadotte Chronology of Events Q4: Perform a comprehensive strategic analysis and prepare a business plan. Present strategic analysis, business plan and financial request to venture capitalists. Q4 – Q6: Initiate international roll-out campaign.

22. Copyright 2006 Ernest R. Cadotte Chronology of Events Q7: Prepare report to the Board regarding –performance since presentation of Business Plan –deviations from plan –justification for departures –strategic analysis of current situation –plan for future

23. Copyright 2006 Ernest R. Cadotte Equity Financing (Q1-Q3) The initial capitalization is 4,000,000 which is being invested by the executive team over the first 3 quarters, 2,000,000 in Q1 and 1,000,000 Q2 and Q3. The executive team owns 100% of the company. Forty thousand shares of stock will be issued to the executive team in exchange for their 4,000,000. The initial stock value is 100 per share.

24. Copyright 2006 Ernest R. Cadotte Equity Financing (Q4) At the start of quarter 4, the executive team will have the opportunity to request up to 4,000,000 from venture capitalists. The venture capitalists will expect a strategic plan for the next three quarters in business, including –strategic analysis of the current situation, –strategy (goals, priorities, and strategic thrusts), –tactical plan (geographic expansion, R&D, plant expansion, etc.) and –pro forma financial statements through Quarter 6

25. Copyright 2006 Ernest R. Cadotte Debt Financing (Q4 and beyond) The bank will extend a line of credit to the executive team equal to one and a half times the firm's equity position in the previous quarter. The bank is highly risk adverse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.

26. Copyright 2006 Ernest R. Cadotte Special Financing Needs The bank is intolerant of poor financial management. If a firm ends a quarter with a negative cash position, the bank will contact a loan shark by the name of Guido to obtain an emergency loan to cover the firm's checking account.

27. Copyright 2006 Ernest R. Cadotte Guido’s Financing Terms Guido requires repayment in the next quarter The emergency loan interest rate is a sliding scale which begins at 10% per quarter and may go as high as 25% per quarter. For each 100 which Guido places in your checking account, he will take one share of stock in your firm. The issuing of stock to Guido causes a dilution of your stock value and your share of the company.

28. Copyright 2006 Ernest R. Cadotte Bankruptcy A firm is technically bankrupt if its cumulative losses exceed its equity investment. Bankruptcy occurs when the sum of the retained earnings and the common and preferred stock is a negative number. Stated differently, the management has used up all of the equity of the firm when the negative value of the retained earnings exceeds the value of the common stock.

29. Copyright 2006 Ernest R. Cadotte Performance Evaluation Balanced Scorecard- cumulative score for quarters 3 through 6 Business Plan Report to Board Strategic thinking and tactical execution Executive Briefings How well the company is prepared for the future

30. Copyright 2006 Ernest R. Cadotte Measurement of the Firm’s Performance The Balanced Scorecard

31. Copyright 2006 Ernest R. Cadotte Why Use a Balanced Scorecard? It is too easy to get caught up in market share and short-term profits. Long-term viability requires that managers also deliver customer satisfaction and invest in the future. The balanced scorecard measures both the long-term and the short-term. The best managers will be good in all areas measured.

32. Copyright 2006 Ernest R. Cadotte Total Business Performance Financial performance Market performance Marketing effectiveness Investments in the firm’s future Creation of wealth Asset management Human resource management

33. Copyright 2006 Ernest R. Cadotte End of Introduction to Strategy and Business Policy

34. Copyright 2006 Ernest R. Cadotte The following slides provide an introduction to the Web Software for Strategy and Business Policy in the Marketplace

35. Copyright 2006 Ernest R. Cadotte Marketplace is a Fun Way to Learn About Strategy It is a business game. It is learning by doing. It brings to life business concepts, principles, and ways of thinking. It energizes the competitive spirit. It is transformational – it all comes together, discover you can be a manager

36. Copyright 2006 Ernest R. Cadotte It Is Realistic! You do what real-life strategists do: –Evaluate market opportunities –Write a business plan –Raise money by selling your plan to investors –Do what you said would work – execute the plan –Be judged not by your promises but by your results

37. Copyright 2006 Ernest R. Cadotte You Will Actually Run the Business Design brands Distribute products to end users Workup advertising campaigns Decide on employee compensation Schedule production Worry about profits Manage cash flows Etc.

38. Copyright 2006 Ernest R. Cadotte It Is Organized! The game scenario follows the logical process of starting up a new company. You are guided through the strategic planning and decision-making processes. Detailed help files are available at the touch of a button.

39. Copyright 2006 Ernest R. Cadotte You Will Sweat the Details Investors are challenging Customers are demanding Competitors are unrelenting Many functional, tactical decisions to master Decisions must be well coordinated and timed Cash is always a constraint Constant skillful adjustment is required to stay on course and get ahead

40. Copyright 2006 Ernest R. Cadotte You will be Driven! Inherent competitiveness – it is in your genes Ownership – it is your business, your money, your responsibility Captivating – try ideas and see results immediately

41. Copyright 2006 Ernest R. Cadotte Discussion and debate within each team Managing many tactical decisions within financial constraints, demanding customers and aggressive competitors Preparation of business plan Negotiations with Venture Capitalists Instructor interaction with teams –Regular Executive Briefings Development of Your Critical Business Skills

42. Copyright 2006 Ernest R. Cadotte Sequence of Key Activities Startup phase (3 quarters) –Organize the team and learn to work together –Learn the business –Test the market Transition phase (one quarter) –Prepare Business Plan to accelerate growth –Present Business Plan to and negotiate equity investment with independent Venture Capitalists Growth phase (3 quarters) –Execute Business Plan –Skillfully adjust tactics in response to unforeseen problems and opportunities Final accountability - present Report to Board

43. Copyright 2006 Ernest R. Cadotte Introduction to Software

44. Copyright 2006 Ernest R. Cadotte Marketplace is available via Netscape and Internet Explorer. Go to: marketplace6.com

45. Copyright 2006 Ernest R. Cadotte The step-by-step process that walks you through the information and decisions. The software controls your progression to reduce your uncertainty and to help you see the logic of the marketing process.

46. Copyright 2006 Ernest R. Cadotte Be sure to read the directions on how to use the Marketplace software.

47. Copyright 2006 Ernest R. Cadotte For illustration purposes, suppose you start up a company named Traveler Computers.

48. Copyright 2006 Ernest R. Cadotte What are the pros and cons of each sales channel? You can setup an international Web Center for e-commerce, and/or four international sales offices.

49. Copyright 2006 Ernest R. Cadotte Market Segments (Market Structure) Price Performance Work Horse Traveler Mercedes

50. Copyright 2006 Ernest R. Cadotte Each market segment has its own set of needs.

51. Copyright 2006 Ernest R. Cadotte You must decide which segment you want to target initially. As the exercise progresses, you are asked to select a second segment. For example, the Traveler segment might be selected.

52. Copyright 2006 Ernest R. Cadotte Once you select a segment, you must design a brand to meet the needs of the segment. What features would make a computer more attractive to the Traveler segment?

53. Copyright 2006 Ernest R. Cadotte You set the selling price, decide if you want to use a rebate, and signal to the sales staff which brand has the highest priority.

54. Copyright 2006 Ernest R. Cadotte You must design ads which appeal to the target segment. You select the benefits to mention in the ad and indicate their order of priority. You decide which brand will be featured in the ad.

55. Copyright 2006 Ernest R. Cadotte You can select marketing tactics that can increase the traffic to your site. You can spend more or less than the industry norm to potentially change the relative attraction of your web site. What commission should you offer your partners?

56. Copyright 2006 Ernest R. Cadotte Once at your web site, what can you do to increase the probability visitors will make a purchase? The tactics are not equally good and some may not justify any expenditure.

57. Copyright 2006 Ernest R. Cadotte You must decide on the compensation package for your employees.

58. Copyright 2006 Ernest R. Cadotte You can specify how many should be assigned to each segment and service support. And, how many sales people to employ.

59. Copyright 2006 Ernest R. Cadotte How many units should you produce to meet demand?

60. Copyright 2006 Ernest R. Cadotte And, how much should you invest in plant capacity for next quarter given your demand forecast and financial liquidity.

61. Copyright 2006 Ernest R. Cadotte When your decisions are ready to be processed through the Marketplace simulator, a quality check is made to make sure there were no entry errors and nothing important was forgotten.

62. Copyright 2006 Ernest R. Cadotte Immediately after processing, you find out how profitable the firm was in the quarter that just ended.

63. Copyright 2006 Ernest R. Cadotte You can see your market share by segment and for the whole market. Your company is Traveler.

64. Copyright 2006 Ernest R. Cadotte You are given market research that tells you how satisfied your target segment is with your brand design and those of the competition. 100 is total satisfaction.

65. Copyright 2006 Ernest R. Cadotte You are also given a profit analysis of each brand so that you can adjust your brand strategy.

66. Copyright 2006 Ernest R. Cadotte If a brand is not doing well, you can study other brands and redesign your brand. Your brand Better brand

67. Copyright 2006 Ernest R. Cadotte Grading:The Balanced Scorecard Final evaluation will be computed based upon: –Financial Performance (earnings per share) –Market Performance (market shares in 2 target segments adjusted for unmet demand) –Marketing Effectiveness (customer satisfaction with brand and advertising designs in 2 target segments (scored 0 to 100) plus unit sales per sales person) –Investments in the Future (spending on new offices and research and development as percent of sales) –Creation of Wealth (retained earnings/total investment) –Asset Management (asset turnover adjusted for excess inventory) –Human Resource Management (sales force and factory worker productivity) –The Final Score is a single number which combines all of these factors. The results of Quarters 3 through 6 will be used to compute the grade.

68. Copyright 2006 Ernest R. Cadotte Each quarter, you will be presented with your balanced scorecard. Your goal is to be the best firm by Quarter 6 in Total Business Performance.

69. Copyright 2006 Ernest R. Cadotte You can also compare your scores against industry standards.

70. Copyright 2006 Ernest R. Cadotte Mechanics of Web Marketplace

71. Copyright 2006 Ernest R. Cadotte Students log on to view information and make decisions Marketplace Processing Center Electronic Marketplace Resides at Innovative Learning Solutions

72. Copyright 2006 Ernest R. Cadotte Q1, Organize the Business Name the company Assign organizational responsibilities Share personal learning goals Establish team norms

73. Copyright 2006 Ernest R. Cadotte Q1, Establish Strategic Direction Analyze market information to evaluate the market opportunity Consider Available financial resources Costs to open sales outlets Costs to set up and operate factory Establish strategic direction Formulate corporate strategy Formulate functional strategies

74. Copyright 2006 Ernest R. Cadotte Q1, Setup Shop – Tactical Decisions Locate factory in Toronto – all firms Build fixed plant capacity Develop channel options Decide on relative emphasis of brick and mortar offices versus web centers Open initial sales office or web center Design two brands for target market segments

75. Copyright 2006 Ernest R. Cadotte View Sample Decisions

76. Copyright 2006 Ernest R. Cadotte The Following Slides Represent a Marketing Lecture on Market Response Functions Students must design brands in Quarter 1. In selecting components and price points, they should be aware of the market’s many response functions.

77. Copyright 2006 Ernest R. Cadotte Customers Buy Benefits, Not Features

78. Copyright 2006 Ernest R. Cadotte Once you select a segment, you must design a brand to meet the needs of the segment. Using the computer on the road is important to the traveler segment. What features would provide this benefit? Slim, rugged, portable design 10” color flat screen for portable Network and Internet connections Using the computer on the road

79. Copyright 2006 Ernest R. Cadotte How far do you go in giving the customers what they say they want? Is more speed, software applications, memory, keys on the keyboard, etc. always valued? Could “more of some feature” even make a customer unhappy?

80. Copyright 2006 Ernest R. Cadotte What is the elasticity of the peanut? Searching for the Market’s Response Function

81. Copyright 2006 Ernest R. Cadotte Suppose you could design the ideal candy bar. How many peanuts would you put in the candy bar to make you the happiest? None A few? A bunch? A whole lot?

82. Copyright 2006 Ernest R. Cadotte Which Candy Bar has the Most Peanuts? Baby Ruth Snickers Payday Milky Way

83. Copyright 2006 Ernest R. Cadotte Which Candy Bar Do You Like the Most? Baby Ruth Snickers Payday Milky Way

84. Copyright 2006 Ernest R. Cadotte What does your response function look like for peanuts? Is more always better? Would your happiness increase with every new peanut we added to the candy bar? Is there a limit?

85. Copyright 2006 Ernest R. Cadotte Number of Peanuts Influence of peanuts on candy bar enjoyment None few bunch whole lot Um-um good Yuk

86. Copyright 2006 Ernest R. Cadotte What would be your response function for the following? Chocolate Caramel Nougat Coconut Rice Peanut butter

87. Copyright 2006 Ernest R. Cadotte Here are a number of response functions. Which one applies to peanuts, chocolate, coconut, etc? Hot Cold LessMore Hot Cold LessMore More is always better More is good to a point and then ceases to add excitement

88. Copyright 2006 Ernest R. Cadotte A little is just right, more only takes away value Cold Hot LessMore Hot Cold Less More More adds value to a point & then takes away value Response Functions

89. Copyright 2006 Ernest R. Cadotte Hot Cold Less More Little interest until threshold is crossed Hot Cold LessMore Any amount is bad Response Functions

90. Copyright 2006 Ernest R. Cadotte Hot Cold LessMore No reaction/indifference to having the feature Response Functions

91. Copyright 2006 Ernest R. Cadotte Take Any PC Segment, How Excited Will It Become if You Provide? More memory More functions on the key board More software More …. Just like the candy bar ingredients, you must discover the response function for each PC component.

92. Copyright 2006 Ernest R. Cadotte Select components that yield benefits for Travel PC segment Rugged Micro- High Wireless 6-hour Low-profile, Compact Trackball Wrist rest casementcircuitry resolution modembatterybuilt-in disk, keyboard mouse on keyboard flat LCD CD drives display Portability Use on road Connect to office Easy to use

93. Copyright 2006 Ernest R. Cadotte Learning Points for Quarter 1 Managing the team Organizing the work Deciding what one wants from the learning experience

94. Copyright 2006 Ernest R. Cadotte Learning Points for Quarter 1 Market opportunity analysis Strategic and tactical planning Segmentation and target marketing Financial management

95. Copyright 2006 Ernest R. Cadotte Learning Points for Quarter 1 Game theory - competitive positioning Brand design – –linking product features to customer benefits –finding the customer’s response functions Financial liquidity - cash versus assets

96. Copyright 2006 Ernest R. Cadotte Copyright Dominique Garval 2003 Strategic Planning Mental Discipline Problem Strategy Formulation Tactics Controls Strategic Analysis ObjectivesStrategyTactics Resources made available Strategic options Choice of one option (Chosen Option = Strategic Thrusts) Internal appraisal External appraisal Tactical Plans Execution Definition of problem Note : The chosen option is made of « Strategic Thrusts »

97. Copyright 2006 Ernest R. Cadotte The following slides are for Quarter 2

98. Copyright 2006 Ernest R. Cadotte Q2, Go to Test Market The Goal is to Maximize Learning and Not Profits.

99. Copyright 2006 Ernest R. Cadotte Q2, Go to Test Market 50% of the firm’s decisions will prove to be unacceptable – be careful

100. Copyright 2006 Ernest R. Cadotte Q2, Go to Test Market Set selling prices Develop advertising campaign –design 2 ads, one for each brand –determine number of placements per ad Develop sales channel –hire sales force for quarter –open new sales outlets for Q3

101. Copyright 2006 Ernest R. Cadotte Q2, Test Market Schedule production –forecast demand –set daily production for each brand –run factory simulation, check numbers Contract for market research on customers and competition Check pro forma financial statements

102. Copyright 2006 Ernest R. Cadotte You are a market maker, not a market taker The market is not waiting for you to take their orders. You must create the market –Sell brands that customers want and at a price they are willing to pay –Locate sales offices where the largest number of customers can be found –Inform and persuade customers to buy a PC through advertising –Hire sales people to go out and find customers and persuade them to buy your PC

103. Copyright 2006 Ernest R. Cadotte How to Set Price? Costs (production, marketing, overhead) Profit goals What market will bear Competition

104. Copyright 2006 Ernest R. Cadotte In the beginning, you will not be able to price above your costs There are many startup costs which will exceed your revenues. Your production volumes will be very low, resulting in high per unit costs

105. Copyright 2006 Ernest R. Cadotte No Early Profits Money 0 Time Costs to setup & grow the business +

106. Copyright 2006 Ernest R. Cadotte Revenues will fall below costs at outset of new business Money 0 Time Costs to setup & grow the business Revenue +

107. Copyright 2006 Ernest R. Cadotte Profits will come later Profits come later You are here Profit Profits 0 Time Costs to setup & grow the business Revenue + -

108. Copyright 2006 Ernest R. Cadotte Your goal is to speed up the adoption rate Demand Time introduction growth maturity decline You are here, high costs-low demand

109. Copyright 2006 Ernest R. Cadotte What will the market bear? You must discover the market response function regarding price.

110. Copyright 2006 Ernest R. Cadotte What is the market’s price response function? Your Demand Your Price Elastic (demand drops fast with increasing prices) Inelastic (price is not a big factor)

111. Copyright 2006 Ernest R. Cadotte Or, maybe it looks like this? Your Demand Your Price Demand drops slowly with small price increases and then drops dramatically with larger price increases

112. Copyright 2006 Ernest R. Cadotte A differential advantage can reduce price elasticity Your Demand Price premium for your brand  Less Elastic Elastic Differential advantage shifts demand curve and reduces price elasticity

113. Copyright 2006 Ernest R. Cadotte How will the market respond to competitor prices? Your Demand Competitor’s Price Low competitor prices will kill your demand

114. Copyright 2006 Ernest R. Cadotte How to create ads? Low price Easy to use More productive Fast Office applications Picture office workers Most important Order of priority implies importance of message to customer Order of priority tells the ad agency what to stress in the ad Your Ad Least important

115. Copyright 2006 Ernest R. Cadotte How much to say in an ad? (number of benefits) Which response function is at work? or More is good to a point and then ceases to add excitement Hot Cold LessMore Hot Cold LessMore More adds value to a point & then takes away value

116. Copyright 2006 Ernest R. Cadotte How often do you advertise? Your Demand Number of ads Diminishing returns Too little

117. Copyright 2006 Ernest R. Cadotte But it also depends on what your competitors do Your Demand Competitor’s Advertising Strong competitor advertising will steal away your customers

118. Copyright 2006 Ernest R. Cadotte How many sales people? Your Demand Number of sales people Too many Diminishing returns Too few

119. Copyright 2006 Ernest R. Cadotte Your Demand Number of sales people Shift the response function upwards with better brands, prices, advertising, sales force placement The response function is dynamic!

120. Copyright 2006 Ernest R. Cadotte Managing Inventories and Cash (the razor’s edge) High production –Lower unit production costs –Risk of too much inventory Uses up large volumes of cash Risk of brand obsolesce (wrong product in warehouse) Low production –Low cash requirements –Higher per unit production costs –Risk of too little inventory – Stock outs Lost revenue Customer ill will (unhappy customers)

121. Copyright 2006 Ernest R. Cadotte Projecting Demand Sales people will probably sell between 30 and 100 units each. Demand is a function of market potential of the segment and market and the quality of marketing decisions. On average, sales people will sell 50 units each for the entire quarter.

122. Copyright 2006 Ernest R. Cadotte Expect net losses and negative cash flow Profits come later You are here Profit Profits 0 Time Costs to setup & grow the business Revenue + -

123. Copyright 2006 Ernest R. Cadotte Learning Points for Quarter 2 Execution of a coherent strategy Management of cash in the face of great uncertainty Learning to walk before you run

124. Copyright 2006 Ernest R. Cadotte Learning Points for Quarter 2 Coordinating a host of tactics Pricing - balancing costs, profit, what the market will bear, and competition Testing the market - discovering the market’s many response functions Production - managing capacity, inventories, and costs in light of demand goals

125. Copyright 2006 Ernest R. Cadotte