1. S I M U L A T I O N M A N A G E M E N T Performance Mgt & Assessment

2. S I M U L A T I O N M A N A G E M E N T The Big Picture C ompanyC ompany C onsumersC onsumers C ompetitorsC ompetitors C onditionsC onditions PEST PEST Growth & Competitive Strategies Finance HR Producti on R&D Marketin g Function al Integrati on  Profits  Mrkt Share  ROA  ROS  ROE  Asset T/O  Stock  Mrkt Cap Situation/SWOT Analysis Strategic Planning Functional Integration Performance Assessment

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

4. S I M U L A T I O N M A N A G E M E N T Cumulative Profits Ending Market Share ROS Asset Turnover ROA ROE Ending Stock Price Market Cap. Success Measures Performance Measures- Defined Performance Measures-Dynamics

5. NET PROFITS $$ Year 1 $6 million Year 2 $8 million Year 3 $10 million Year 4 $12 million Year 5 $16 million Year 6 $21 million Year 7 $27 million Year 8 $35 million NET PROFITS $$ 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 CUM PROFIT Typical Range: $20 to $100 M CUM PROFIT Typical Range: $20 to $100 M

6. S I M U L A T I O N M A N A G E M E N T It is important to look at the means used to achieve outcomes …. not just focus on the outcomes themselves To only focus on traditional financial accounting measures (such as ROI, ROE, EPS) ….. does not give mgt the whole picture….

7. S I M U L A T I O N M A N A G E M E N T Performance needs to be judged thru mix of both financial & non-financial measures…. non- financial drivers As - non- financial measures are drivers of financial outcomes Performance needs to be judged thru mix of both financial & non-financial measures…. non- financial drivers As - non- financial measures are drivers of financial outcomes Will Make $$$ - if sell product Will sell product if consumer wants, knows about, can get, & LIKES product To achieve “above’ everyone must effectively do their job To effectively do job must know what to do

8. S I M U L A T I O N M A N A G E M E N T Strategic Thinking- the ten big ideas Strategic Thinking- the ten big ideas Strategic Thinking Strategic Thinking Strategic Thinking- the ten big ideas Strategic Thinking- the ten big ideas Strategic Thinking Strategic Thinking 9 9. Metrics that matter Balanced score card- a system that attempts to balance financial performance w/ consideration of customer's perspective, learning & growth perspective, & internal business process perspective

9. S I M U L A T I O N M A N A G E M E N T

10. S I M U L A T I O N M A N A G E M E N T

11. S I M U L A T I O N M A N A G E M E N T What is measured gets noticed What is noticed gets acted on What is acted on gets improved Today … Balanced Scorecard ~ 70% of Fortune 1,000 companies utilize a Balanced Scorecard to help manage performance— because ….. Today … Balanced Scorecard ~ 70% of Fortune 1,000 companies utilize a Balanced Scorecard to help manage performance— because …..

12. S I M U L A T I O N M A N A G E M E N T

13. S I M U L A T I O N M A N A G E M E N T Balanced Scorecard Puts Mission- Vision- Values & Strategy At Top of Assessment System

14. S I M U L A T I O N M A N A G E M E N T

15. S I M U L A T I O N M A N A G E M E N T

16. S I M U L A T I O N M A N A G E M E N T

17. S I M U L A T I O N M A N A G E M E N T For Each Perspective: Financial Objectives Measures Targets Initiatives Responsibility Budget 1. 2. 3. Customer… Business processes… Learning Objectives Measures Targets Initiatives Responsibility Budget 1. 2. 3. Financial Objectives Measures Targets Initiatives Responsibility Budget 1. 2. 3. Customer… Business processes… Learning Objectives Measures Targets Initiatives Responsibility Budget 1. 2. 3.

18. S I M U L A T I O N M A N A G E M E N T Basic Scorecard Terminology ( Southwest Airlines Example ) Objectives Fast ground turnaround Objectives: What the strategy is trying to achieve Targets 30 Minutes 90% Targets The level of performance or rate of improvemen t needed Cycle time optimization Initiatives Key action programs required to achieve targets InitiativesMeasures On Ground Time On-Time Departure Measures How performance is measured against objectives Strategic Theme: Operating Efficiency Profits and RONA Financial Learning Ground crew alignment Lowest prices Fewer planes Customer Internal Fast ground turnaround Strategy Map On-time Service Attract & Retain More Customers Grow Revenues

19. S I M U L A T I O N M A N A G E M E N T % Ground crew trained % Ground crew stockholders A Complete Scorecard is a Program for Action ObjectivesMeasures # Customers FAA On Time Arrival Rating Market Survey On Ground Time On-Time Departure Strategic Theme: Operating Efficiency Initiatives Cycle time optimization Ground crew training ESOP Customer loyalty program Quality management Targets 30% +/yr 20% 5% 12% growth Ranked #1 30 Minutes 90% yr. 1 70% yr. 3 90% yr. 5 100% Profitability Grow Revenues Fewer planes More Customers Flight is on - time Lowest prices Fast ground turnaround Ground crew alignment Strategic Theme : Operations Excellence Profits and RONA Financial Learning Ground crew alignment Fewer planes Customer Internal Fast ground turnaround Attract & Retain More Customers Grow Revenues Lowest prices On-time Service

20. S I M U L A T I O N M A N A G E M E N T Capstone's Balanced Scorecard Manager's Guide: Balanced ScorecardBalanced Scorecard Capstone's Balanced Scorecard Manager's Guide: Balanced ScorecardBalanced Scorecard

21. S I M U L A T I O N M A N A G E M E N T Additional Tools/Techniques for Managing & Assessing Your Performance: 1. Accurate Sales Forecasting 2. Marketing- Evaluation Checklist 3. Round Analysis & Analyst Report

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

23. Sales Forecasting 1. Quick N’ Dirty 2. Consumer Pref’s 3. Best / Worst Case

24. Estimate Your FAIR SHARE Answer 2 Q’s: 1.What will average product sell in this segment next round? 2.To what degree is your product above or below average- on consumers'’ buying criteria?

25. 1 2 3 4 Fair Share - Sales Forecast Determine industry demand next round. Take last year’s total demand -- multiply by (1 + Growth Rate). Estimate # products that will be in segment. Divide total industry demand by the number of products. Your product’s demand will typically be between one half and twice 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?

26. #2 Forecast by Consumer Pref’s

27. Forecast off Customer Survey Scores

28. 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%

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

30. Total=223 R#1 Dec Survey score % of 223Predicted 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 36 16%1539 1492 Cake 42 19%1827 1339 Daze 26 12%1154 1045

31. R#1 Survey score 43 40 36 42 26 R#2 12

32. CA SE

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

34. Maintain Adequate working capital & cash reserves In order to: Avoid “Big AL” & a Liquidity Crisis- Need to:

35. 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

36. $0.00 In WORSE CASE: You have lots of Inventory & little or no Cash. In WORSE CASE: You have lots of Inventory & little or no Cash.

37. $0.00 In WORSE CASE: You have lots of Inventory & thus need to drive your cash position to the black… In WORSE CASE: You have lots of Inventory & thus need to drive your cash position to the black…

38. 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. 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. To adjust your cash position --

39. Important Considerations re: BEST-WORST Scenario Analyses By adjusting your CASH POSITION according to your WORST CASE estimate– NOT ONLY will avoid … BiG AL By adjusting your CASH POSITION according to your WORST CASE estimate– NOT ONLY will avoid … BiG AL

40. Also Avoid Stock-Outs! 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 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

41. For example, 1. If your annual sales were $120M, in one month you’d sell $10M. 2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin. 3. This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.

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

43. 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

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

45. & Divide by total variable costs of inventory sold: $23,900M/$131,119M =.18 52weeks *.18 = 9 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

46. Additional Tools/Techniques for Managing & Assessing Your Performance: 1. Accurate Sales Forecasting 2. Marketing- Evaluation Checklist 3. Round Analysis & Analyst Report

47. S I M U L A T I O N M A N A G E M E N T Evaluating Product Success

48. S I M U L A T I O N M A N A G E M E N T Simulation Scoring System

49. S I M U L A T I O N M A N A G E M E N T Round analysis -example

50. S I M U L A T I O N M A N A G E M E N T The Relationship between Your Strategy & Success Measures One more thing to think about:

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

52. M A R K E T I N G M A N A G E M E N T Select Success Measures & Determine Relative Weightings Need to enter weightings – prior to round-1 Select Success Measures & Determine Relative Weightings Need to enter weightings – prior to round-1

53. 1) Draft- Financial Objectives & TacticsFinancial 2) Draft- Mission & Vision StatementsMission & Vision This week’s assignment: