H. B. S. FEB. 19, Introduction 2. 7 Pricing 8. 8 Press 9

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1 H. B. S. Strategic Brew Since 2015 STRATEGIC BREW V.2 USER MANUAL Contents FEB. 19, Introduction 2 2 The Dashboard Forecast dashboard Historical dashboard Products Beer features Customer segments Market awareness and popularity Customer benefit (WTP) and demand Beer redesign Deactivating and reactivating beers Capacity Process innovation Manufacturing Maximum production Advertising & Marketing Allocating your advertising budget Marketing costs Pricing 8 8 Press 9 9 Financials The footer Page Professors Ramon Casadesus-Masanell (HBS) and Gastón Llanes (Pontificia Universidad Católica de Chile), and HBS Information Technology prepared this guide for the sole purpose of aiding students in the use of Strategy Simulation: Strategic Brew. This guide and the simulation are developed solely as the basis of class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. 2014, 2015, 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call , write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

2 10 Intelligence 9 11 Debt & Equity Financing capital expenditures Financing working capital needs Revenues and costs Revenues Costs Appendix 12 A1. Choices available to breweries each round A2. Segment profiles A3. Preference heterogeneity within segments: AWTP and cawtp A4. The waterfall diagrams A5. Requesting control of the simulation A6. Support page & videos A7. Minimum technical requirements Optional Assignment: Dashboard Tutorial 23 Answers to the Optional Assignment This document presents a nontechnical introduction to Strategic Brew, a market simulation developed at the Harvard Business School. It should be read by players in preparation for class. The manual presents the constituent elements of the simulation and explains how to play. It is complementary to a technical manual available from the authors and to a series of videos developed by Educational Technology Services at HBS which cover similar ground. 1 Introduction In this simulation you are in charge of running one of five competing beer breweries which have access to the same set of potential customers (brewery names: ALEWIFE, BEACON, CEDAR, DEER, and ESSEX). The simulation progresses in rounds, each round corresponding to a period of three months. Each round you must make choices on a number of functional areas (product design, capacity, manufacturing, advertising...) and your choices, as well as those of your rivals, will determine the attractiveness of your beer(s), your market share, cost position, and profits. Appendix A1 presents a summary of the choices available to you each round. The objective of the simulation is to maximize your brewery s performance while operating as an ongoing business concern. In most companies, no one tells management exactly which yardstick is used to measure performance. Stock markets and private investors aggregate many different views and measures in a somewhat opaque way. Similarly, this simulation offers several metrics from which to measure performance. 2 The Dashboard The DASHBOARD page offers summary information of the state of the simulation. It has two modes: (i) Forecast, and (ii) Historical. You may toggle between both modes by clicking on the calendar icon, and. 2014, 2015, 2016 President and Fellows of Harvard College 2

3 Strategy Simulation: Strategic Brew 2.1 Forecast dashboard All data about your brewery shown here are current round. Data shown about other breweries are last round. To compute your projected performance for the current round, the simulation assumes that (i) your rivals will keep the product portfolio they had last round and (ii) they will produce sufficiently many barrels to satisfy demand for their beers. By clicking on one of the five selections in at the top of the page, you may choose a particular outlook for current round forecasts. The more negative (i.e., more to the left) the chosen outlook, the larger the assumed increase in quality (from what it was in the previous round) for the beers offered by your rivals. And the more positive (i.e., more to the right), the smaller the increase in quality. The Forecast dashboard includes the following data: 1. Customer benefit here called Willingness to Pay (WTP), price, and cost graph. This graph shows a bar diagram with summary beer performance. Specifically, the bars plot (1) average customer benefit (i.e., average willingness to pay) of all customers who purchased the beer, (2) price, and (3) total cost per barrel. By clicking on the brewery icon, you will see summary performance for all of the beers that you offer, regardless of target segment. By clicking on any one of the customer segment icons (PREMIUM, CRAFT, REGULAR, FLAVORED LIGHT, and ECONOMY ), you will see summary performance for all beers addressing that segment, regardless of brewery. As noted, for breweries other than your own, the data shown are last round (and to indicate that these are indeed last-round data, they appear with a darker background). If you click on the bar diagram for any of the displayed beers, you see a waterfall diagram that breaks down average customer benefit (i.e., average WTP) by customers in the target segment, as well as total cost per barrel (see Appendix A4). And if you click on the elements in the waterfall with red borders (i.e., Beer features, Popularity, COGS, and Other fixed costs), you will see additional waterfall diagrams that provide further decomposition. When viewing a waterfall diagram, if you click on any of the customer segment icons (,,,, ), the displayed customer benefit (WTP) data will correspond to the segment you have chosen to display. Note finally that you have access to these data not only for your brewery, but also for all of your competitors beers (last round data). 2. Demand, barrels available & manufacturing capacity. This panel presents horizontal bar diagrams showing last round demand, current round forecast, and total barrels brewed. To the right of this diagram there is a pie chart representing your brewery s manufacturing scale: capacity available, capacity used, and new capacity (available next round). When looking at last round demand data, the simulation refers to primary demand and to secondary demand : Primary demand is demand by those customers who prefer your beer to all other beers available in the market. A customer prefers your beer if the wedge between customer benefit (WTP) and price is the largest among all beers available. Secondary demand is demand by customers who prefer other beers but who were unable to purchase them due to shortages in supply. These customers considered your beer as second best. You may think of primary demand as true demand and of secondary demand as demand that you received because of poor manufacturing planning by you rivals. As noted, the demand forecast for the current round shows primary demand only (i.e., it assumes that your rivals will produce sufficiently many barrels to satisfy all of their primary demand). 3. Beer economics. This table provides details on the profitability of your beers. If you click on any of the row titles, a graph appears that shows the evolution of that row entry since the beer was introduced. If you click on any of the following figures: Price, COGS, Transport costs and taxes, Advertising, and Other fixed costs, you will see a graph that shows the evolution over time of beer economics. 4. Product and customer scope. This table presents sales (in barrels) and their percentages (out of total brewery sales) of each beer offered to each customer segment. Thus, the table presents a summary of the brewery s 2014, 2015, 2016 President and Fellows of Harvard College 3

4 Strategy Simulation: Strategic Brew product and customer scope as it indicates the customer segments that purchased each beer. In addition to the percentages, the table includes a heat map: the beer-segment cells with the largest figures appear on a darker background. 5. Changes in inventory. Here we show quantity available of each beer, sales, spoilage, and next round s beginning inventory. 6. Segment shares. This bar graph provides a summary of all breweries segment shares, based on quantity sold. 7. Summary pro-forma financials. This panel shows aggregate pro-forma financial data. 2.2 Historical dashboard The Historical dashboard contains the same information as the Forecast dashboard except that all data are from last round and you can access data on all breweries, not only your own. To select a particular brewery, click on the brewery icon at the top-left of the page (ALEWIFE), (BEACON), (CEDAR), (DEER), and (ESSEX). 3 Products The PRODUCTS page is where you compose new beers. This page also allows you to redesign or to deactivate existing beers as well as to reactivate any beers you deactivated in earlier rounds. 3.1 Beer features To design a beer, you must choose the values of its features. You will see dark-colored intervals on each attribute slider. The target segment s desired values for each attribute fall within the range indicated by these intervals. There are eleven features: Beer-style features directly chosen by the brewery: the following features are independent of each other. 1. Alcohol: from 0% to 14%. 2. Color: from light to dark. 3. Balance: from sweet (much more grains than hops) to bitter (much more hops than grains). 4. Carbonation: from flat to bubbly. 5. Raw material quality: from low quality and cheap to high quality and expensive raw materials. 6. Special ingredient: this is a categorical feature with four values none, fruit, spice, and wheat. Computed beer-style features: the following two features are calculated as functions of the other features. 7. Calories: from 50 to 350 (per 12oz serving). This feature is impacted by alcohol. 8. Flavor intensity: from mild (0%) to potent (100%). This feature is impacted by: alcohol, color, balance, carbonation, raw material quality, special ingredient, and flavor preservation packaging. Marketing and packaging features. 9. Packaging: this feature has three values can, bottle, and special bottle. 10. Opening mechanism: this feature has four values pull-tab, pop-top off, bottlecap, and twist Flavor preservation: this feature has two values no 2014, 2015, 2016 President and Fellows of Harvard College and yes. 4

5 Strategy Simulation: Strategic Brew Your choice of beer features affects customer benefit (i.e., willingness to pay) for the beer and its cost of production.1 For example, higher quality raw materials are generally preferred by customers but quality ingredients are expensive. The evaluation of your beer by customers in the target segment (i.e. how customers rate the beer s value proposition) is shown on the panel to the right of the page: the larger (further to the right) the values in the graph, the more the value of the beer to the segment (on average). The average customer benefit by customers in each segments (see Section 3.2) for the selected beer is shown in the bar diagram at the bottom of the PRODUCTS page. (More on customer benefit in Section 3.2.) Just as in the Dashboard, you may click on any one of the bars to display a waterfall diagram with the various components that make up customer benefit for the beer by customers in the selected segment. The panel on the top-right corner also shows a breakdown of each of your beers raw materials costs as well as a breakdown of their capacity requirement (to access these diagrams, please click on the arrows to the right or to the left of the value proposition graph). When launching a new beer, you will incur a launch cost. The dollar amount of the launch cost is shown in the icon to create a new beer. dialog box that appears when you click on the Finally, the segment-specific marketing costs are shown at the bottom of the product features panel (i.e., the panel on the left). 3.2 Customer segments Each beer targets a particular customer segment. When introducing a new beer, you must declare its target segment the segment where your advertising and marketing dollars for the beer will be directed. You may change a beer s target segment at any time during the simulation. The segments are: PREMIUM, CRAFT, REGULAR, FLAVORED LIGHT, and ECONOMY. Segments differ in size and in consumption per capita. Per capita consumption grows with aggregate advertising expenditures (i.e., advertising expenditures by all breweries for all the beers that target the segment). Appendix A2 presents detailed segment profiles. Each customer segment is defined by a set of weights (or importance) that individuals in the segment attach to each beer feature. Segments are composed of heterogenous consumers with idiosyncratic preferences. Appendix A3 illustrates this concept. As noted, to guide the design of your beers, you will see dark-colored intervals on each attribute slider. The target segment s desired values for each attribute fall within the range indicated by these intervals. For some attributes (e.g., raw material quality), the dark-colored intervals are narrow. For these, you have accurate knowledge of customer preference. For other attributes, the intervals are wide and, thus, your initial knowledge of customer preference is imprecise. There are three ways in which you may learn about customer preferences: experimentation, observing the choices and performance of your rivals, and reading carefully Appendix A2. Although all customers in any given segment rank the 11 beer features similarly, they typically disagree on what are the most desired values of some features. For example, all PREMIUM customers rank beer features as follows: Alcohol Color Raw material quality Packaging Balance Flavor intensity Carbonation Flavor preservation 9. Special ingredient 10. Calories 11. Opening mechanism However, different customers in this segment prefer different particular values of some of the features (e.g., some prefer high alcohol and others prefer low alcohol). 3.3 Market awareness and popularity In addition to product design, two other factors affect customer benefit (i.e., willingness to pay): market awareness and popularity. Awareness increases with advertising expenditures (see Section 6) and popularity with sales, but both depreciate over time. When a beer changes target segment, awareness and popularity are set back to the initial levels (as if it was a new beer). When a beer is deactivated (i.e., the brewery stops production and marketing of the beer see Section 3.6), awareness and popularity continue to depreciate, but at a larger rate than if the beer was active. If and when 1 All inputs are sourced from competitive markets, which means there is no scope for capturing further value from suppliers (i.e., c=cs). 2014, 2015, 2016 President and Fellows of Harvard College 5

6 the beer is reactivated, the remaining awareness and popularity contributes to willingness to pay for the beer, and awareness and popularity begin to depreciate at regular rates. 3.4 Customer benefit (WTP) and demand As noted, average customer benefit (AWTP) by customers in any given segment for the selected beer is shown at the bottom-right bar diagram. 2 When choosing which beer to purchase, customers consider all beers available, and purchase the one for which the gap between customer benefit and price is largest. If none of the available beers is sufficiently attractive, customers choose to stay out of the market. The PRICING page (see Section 7) provides estimates of demand to inform your pricing choices. We note that customers in a segment different from the one you target your beer may wind up purchasing it: it all depends on what other beers are available, their prices, and the heterogeneity in segment preferences. 3.5 Beer redesign You may redesign an existing beer by changing feature values (alcohol content, color, balance...). When you do so, the existing inventory (if any) becomes much less attractive to customers. It is assumed that this inventory is priced at a discount in fact, it is priced at a level close to its average variable cost of production and distribution and sold abroad. Therefore, the sale of existing inventories of redesigned beers does not affect domestic demand. 3.6 Deactivating and reactivating beers The simulation allows you to create a maximum of eight beers and, at any time, you may deactivate existing beers. If you do so, barrels in inventory are sold at a discounted price that ensures that the entire inventory of that beer is sold. Just as for inventories of redesigned beers (Section 3.5), we assume that the discounted beer is sold abroad and, thus, its sale does not affect domestic demand. If at a future date you would like to reactivate a previously deactivated beer, you may do so at a relaunch cost. This cost is shown at the bottom of the beer-design panel on the PRODUCTS page. 4 Capacity The CAPACITY page is where you choose the capacity of your plant. Minimum plant capacity is 1, 000, 000 barrel hours per quarter (recall that a round corresponds to a period of three months). The maximum plant capacity is 50, 000, 000 barrel hours per quarter. However, as explained in Section 11, the financial health of your brewery will determine the maximum amount by which you will be able to increase brewing capacity at any given time: A small plant quarter. has capacity between 1,000,000 barrel hours per quarter and 2,999,999 barrel hours per A medium plant per quarter. has capacity between 3,000,000 barrel hours per quarter and 8,999,999 barrel hours A large plant per quarter. has capacity between 9,000,000 barrel hours per quarter and 19,999,999 barrel hours An extra large plant hours per quarter. has capacity between 20,000,000 barrel hours per quarter and 50,000,000 barrel 2 The quantification of average customer benefit takes into consideration the design of your beer, market awareness, and beer popularity. 2014, 2015, 2016 President and Fellows of Harvard College 6

7 Labor and fixed production costs vary across plant sizes. Smaller plants are less capital intensive but more labor intensive. New construction is cheaper (per unit of capacity) than adding capacity to an existing plant. Moreover, there are increasing returns to expanding capacity: the marginal cost of expanding capacity decreases with the size of the increase in capacity. You may also decrease capacity. When doing so, you obtain scrap value for the capacity sold (as described in Section ). However, since you are asked to run your brewery as an ongoing business concern, the simulation does not allow complete exit; at the very minimum, you must keep minimum capacity (1,000,000 barrel hours per quarter). The cost of building capacity and the revenue from selling capacity are displayed in the CAPACITY page. Adding manufacturing capacity is time consuming: if you build a new plant or add capacity to an existing plant in round t, the new capacity will be available for production in round t +1. However, capacity reductions take effect immediately. Different beer types take on different lengths of time to brew, and therefore make different use of brewing capacity. The PRODUCTS page indicates the capacity requirement to brew a barrel of each beer in your portfolio. At the top-left of the CAPACITY page you will see a horizontal bar graph that shows total barrels demanded last quarter, projected demand for the current quarter, and the sum of current quarter s production and outstanding inventory. 4.1 Process innovation You may invest in process innovation to improve your brewing process and reduce manufacturing costs. Process improvements result in labor cost savings and in lower maintenance costs. The marginal effect of investment in process technology is always positive but decreasing. The percent change in process efficiency from last round is shown on the CAPACITY page. Process efficiency improves with investments in process innovation but depreciates over time. The page also shows the percent decrease in labor and capital-related costs due to improvements in process efficiency. 5 Manufacturing The MANUFACTURING page is where you choose how many barrels to produce of each beer in your portfolio. The page has graphs that show the behavior of costs as you change the level of production. Specifically, the page displays three measures of production cost level: Average variable cost of production (AV C ). The per barrel average variable cost of production of a beer is the sum of raw material cost, utilities cost, and labor cost. Marginal cost of production (MC ). Marginal cost of production is the increase in total cost that results from brewing one additional barrel of the beer under consideration. Average total cost of production (ATC). Average total cost of production is the total cost of production (fixed and variable) divided by total quantity produced. 5.1 Maximum production To avoid building large amounts of inventory due to unexpected changes in demand that tie up large amounts of cash and may need to be sold at a discount, manufacturing automatically adjusts production so that you do not overproduce mightily in case that your estimates of demand are inaccurate. Specifically, if demand for your beer is larger than the quantity you chose to brew, actual production winds up being exactly what you chose. However, if demand for your beer is smaller, then actual production winds up being quantity demanded plus a proportional penalty for overproduction: actual quantity produced = quantity demanded + 10% ( intended quantity produced quantity demanded ). This ensures that your brewery avoids tying up large amounts of cash in inventory in the event that your demand forecast is way off. Note, however, that this also means that you cannot build up inventory for next period beyond this quantity. 2014, 2015, 2016 President and Fellows of Harvard College 7

8 6 Advertising & Marketing Advertising increases product awareness. Product awareness, in turn, affects each segment s per capita consumption as well as willingness to pay (customer benefit) for the beer. 3 The ADVERTISING page indicates the percent increase in awareness from last round. If you do not advertise, awareness will decrease (as it depreciates over time). 6.1 Allocating your advertising budget The effect of advertising on awareness levels off as you increase advertising. In particular, there is a maximum potential increase in awareness of 10% in any given round. If you advertise above the level that results in the 10% increase, the extra dollars are wasted. To simplify the allocation of your advertising budget across products, the ADVERTISING page contains a button that sets advertising expenditures for each product so that the percent increase in awareness from last round is maximized. The page allows you to fine-tune advertising for each individual beer if there is a need to tighten the proposed allocation. 6.2 Marketing costs In addition to advertising, there are marketing fixed costs that the brewery must incur each quarter to market each beer. The dollar amount of these segment-specific marketing costs can be found at the bottom of the top-left panel on the PRODUCTS page. You will see that for some segments these costs are low, while for others they can be substantial (see Appendix A2) (e.g., for large mass segments, the brewery may need to secure expensive endorsements from celebrities). 7 Pricing The PRICING page is where you determine the price at which each of your beers will be sold to distributors. The page provides a scratchpad to test pricing scenarios. Projected demand graph assumes that your rivals will maintain the same beer portfolio and prices that they had in the previous round. However, you may use the Choose Outlook selector at the top of the page to get insight on how demand for your beers changes as your rivals beer quality changes. As noted, the less favorable (i.e., more to the left) the chosen outlook, the larger the assumed increase in quality (from what it was in the previous quarter) for the beers offered by your rivals. The PRICING page shows the following information: Projections:. Price. This is the price at which your beer is sold. To prevent the sale of beer at anticompetitive prices, the simulation computes a minimum wholesale price below which you cannot sell your beer: variable cost of production + inventory carrying costs + excise taxes + distribution costs. If the price you enter in the text box is less than this minimum price then the simulation will automatically set your price to the minimum price allowed. In other words, the effective wholesale price is the maximum between your chosen wholesale price and the minimum wholesale price. Barrels demanded. This is the projected demand for your beer, given your prices, product portfolio and the willingness to pay for your products. In addition to the point estimate, the simulation presents a plot of the demand function for the selected beer (the blue downward sloping line). You can change price on the graph (by mousing over the demand function) to determine the projected quantity demanded and profitability of your beer. The figure also plots the variable contribution profit at different price levels. 4 Barrels available to sell. This is the the quantity of beer you have available to sell (i.e., inventory at the beginning of the round plus current round production). If there is a projected shortage, the row is displayed over a pink background. Barrels sold. This is the minimum between projected demand and barrels available to sell. 3 Customer benefit is also affected by the beer features and how these features match what customers look for, and by the beer s popularity. 4 Variable contribution is computed as revenue minus variable cost (COGS, transportation cost, and excise taxes). 2014, 2015, 2016 President and Fellows of Harvard College 8

9 Projected beer economics (per barel). These consist of the following: COGS, transport costs & excise taxes, advertising, other fixed costs, and value captured (profit). Projected performance. Here, you will see: total revenue, total variable cost, total variable contribution, total avoidable fixed costs, and total contribution to brewery profitability. Past information: Price, barrels demanded, barrels sold, value captured (profit) per barrel, and total value captured (profit). 8 Press You may use the PRESS page to make up to one press release per round. All press releases will be visible to your rivals during the current round of play. When rivals submit a press release, a red dot will appear at the top of the 1 envelope at the top of the page. You may click on the envelope to read the press release. Macroeconomic trends affecting the market as a whole (e.g., expected size of each segment next round, overall trends in consumption per capita...) are also displayed there. 9 Financials The FINANCIALS page presents full financial statements (income statement, statement of cash flow, and balance sheet) for all breweries and all rounds, including pro-forma financials for the current round. By clicking on any row in the statements, a plot of the evolution of that measure is displayed on the right hand side. 9.1 The footer The footer at the bottom of every page provides a forecast of your brewery s performance for the current round (i.e., what should happen after the simulation is stepped). As you modify your choices, the footer will provide updated forecasts. The footer also responds to your choice of outlook at the top of the page. We note that the weighted average cost of capital used to compute economic performance (the measure at the bottom-right of the footer) is 2.5% per quarter and that invested capital is calculated as property, plant and equipment plus 10% of sales (an approximation to working capital needed to run your business). 10 Intelligence After stepping the simulation to the next round, you will receive a complete industry intelligence report. To access this report, please click on INTELLIGENCE. The report contains the following information: (1) team member names, (2) summary financial metrics for all rivals, (3) financial statements (income statement, statement of cash flow, and balance sheet) for all rivals, (4) segment updates (demand, sales, and market shares), (5) segment value creation and value capture diagrams, (6) beer economics, (7) capacity and manufacturing summary, and (8) press releases and information on industry evolution. Warning! We recommend that, for your records, you save each round s intelligence report as a pdf. 11 Debt & Equity A brewery s total assets are financed with equity (paid in capital and retained earnings) and debt (mortgage loans, inventory loans, and bailout loans). Paid in capital is the total capital contribution, at par value, by investors. In return for capital, investors receive equity in the brewery. The paid in capital account remains constant throughout the simulation. For simplicity, we assume that breweries do not distribute dividends, so the retained earnings account is only impacted by operations. The total stockholders equity is the sum of paid in capital and retained 2014, 2015, 2016 President and Fellows of Harvard College 9

10 earnings. Total stockholders equity can be negative if cumulative losses exceed cumulative income + paid in capital. The simulation prevents breweries from going bankrupt by providing bailout working capital loans Financing capital expenditures Breweries can finance capital expenditures, such as the construction of a new plant or the addition of plant capacity, by securing a mortgage. We assume that mortgages are 25-year (100 quarter) fixed interest rate loans. The quarterly mortgage rate is 1.5%. Each time a firm needs cash to expand capacity, it must obtain a new mortgage for the capacity addition. We require breweries to make a minimum downpayment of 10% of the size of the loan. Without this downpayment, the bank does not grant the mortgage. The simulation allows breweries to make a larger downpayment. Consider an asset acquired by your brewery by securing a mortgage. Over time, the balance owed to the bank decreases for two reasons. First, the quarterly mortgage payments include repayment of principal. Second, breweries are allowed to repay additional principal balance with additional downpayments, but are under no obligation to do so. Prepaying the principal will lower the monthly payment but the term of the loan will not be affected. We assume that the bank will approve a mortgage loan as long as Total Debt + Additional Mortgage x. Equity Initially, we set x = 1.5, but this may change throughout the simulation. Even when x = 1.5, a brewery s actual mortgage debt to total shareholders equity ratio could be higher than 1.5 if a brewery has a decrease in retained earnings or a new inventory or bailout loan (see below). The 1.5 number is simply the maximum ratio that banks will allow. For instance, if a brewery mortgages the construction of a new plant in Round 1, raising the brewery s mortgage debt to shareholders equity ratio to 1.5, and then occurs a loss reducing total shareholders equity, the resulting mortgage debt to shareholders equity ratio would be higher than Financing working capital needs Inventory loans Inventory of finished product is automatically financed with inventory loans, which carry a low interest rate of 0.5% per quarter. Inventory is valued at manufacturing cost. For simplicity, we assume that the inventory loans are interest only. Inventory loans are paid back as soon as inventories are sold Bailout loans If a brewery does not have enough cash to cover working capital needs, a bailout loan will be automatically approved, with the proceeds being credited to the brewery s cash account. The interest rate on bailout loans is 10% per quarter. The size of the bailout loan will be computed so that the brewery s cash balance, after expenses during the round are paid, is equal to zero. For simplicity, we assume that the bailout loan is interest only while net cash flow is negative. Once a brewery returns to positive cash flow, all positive cash flow will be applied towards paying down the bailout loan s principal balance. 12 Revenues and costs 12.1 Revenues Breweries may obtain revenues from four different sources: Sale of active beers. The sale of active (non-deactivated) beers generates revenues equal to barrels sold times price per barrel. The dollar amount of this revenue can be found on the DASHBOARD. Sale of deactivated beers. Breweries sell existing inventory of deactivated or redesigned beers at a discount. The total revenue derived from such sales is shown at the bottom of the PRODUCTS page. 2014, 2015, 2016 President and Fellows of Harvard College 10

11 Sale of brewing capacity. Breweries obtain scrap value from the sale of manufacturing capacity. The dollar amount is shown in the CAPACITY page. The loss on the sale of assets is tracked on the income statement. Interest income Cash produces interest income Costs We now describe all costs that breweries incur in their operations Fixed administrative and legal costs These costs correspond to overhead, and depend on the identity of the segments that the brewery targets, the number of beers being sold, and the number of beers brewed. General overhead: firm-level fixed cost corresponding to general overhead such as management compensation and legal costs. These are unavoidable and constant throughout the simulation, but their amount differs depending on the size of the brewery that you operate. Segment-specific costs: segment-specific marketing and promotion costs that must be incurred to address each particular customer segment (as described in Section 6.2). These volume insensitive costs are paid each quarter. Selling costs: non-sunk fixed cost of selling the beer in each particular market. These are per period and per beer, and can be avoided by halting sale of the beer. This cost grows nonlinearly with the number of beers sold. Plant fixed cost: volume insensitive cost that the brewery incurs from running the manufacturing plant. These are per period and their amount differs depending on the size of the brewery that you operate. Operations complexity: volume insensitive cost of manufacturing each additional beer. These costs grow nonlinearly with the number of beers that you offer. These are per beer, per plant, and per period, and can be reduced by producing fewer beers. The dollar value of these costs for the current round can be found on the waterfall diagram on the DASHBOARD Launch and relaunch costs When launching a beer (or relaunching a beer that had previously been deactivated), the brewery incurs launch costs. The dollar value of these costs is displayed on the PRODUCTS page and on the waterfall diagram on the DASHBOARD Capital-related costs: maintenance and rent Capital-related costs are fixed and include maintenance costs and rent. 5 They depend on installed capacity and on present and past investments in process R&D. The dollar value of these costs for the current round can be found on the waterfall diagram on the DASHBOARD Financial costs As noted, breweries can finance capital expenditures, such as the addition of plant capacity, by securing a mortgage. Inventory is financed through low cost inventory loans. Also, if a brewery does not have enough cash to cover working capital needs, an emergency loan is automatically approved. The brewery s financial expenditures in any given round are the sum of its mortgage loan payments (principal and interest), any early loan repayments, and interest payments on inventory and bailout loans. 5 Note that these costs are unrelated to the WACC mentioned above (Section 9.1.) 2014, 2015, 2016 President and Fellows of Harvard College 11

12 Raw materials, utilities, and labor costs Raw materials costs correspond to agricultural inputs, such as barley and hops, and packaging. Utility costs are the costs of energy and water. Raw material and utility costs are variable (i.e., they change with quantity produced). The average costs of raw materials and utilities are constant and equal to their marginal costs. The average rawmaterial cost per barrel of beer depends on beer features as defined in the PRODUCTS page. Utility costs are assumed to be the same for all beers (regardless of capacity requirement) and breweries. Labor costs depend on capacity, process efficiency, and capacity utilization. Specifically, when plant excess capacity is low (i.e., the plant approaches 100% capacity utilization), labor costs grow. The average variable cost of production per barrel of a given beer is the sum of raw materials, utilities, and labor costs. The dollar value of average variable cost of production for each beer can be found on the MANUFACTURING page Transport costs Transportation costs are applied only when the beer is actually sold by distributors to the final customer. Essentially, unsold supply sits in the brewery and is never sent to the wholesaler or retailer. The dollar value of these costs together with the excise tax for the current round can be found on the waterfall diagram on the DASHBOARD Excise tax There is an excise tax of $18 per barrel of beer sold, independent of beer price Inventory costs There is a carrying cost of $1.75 per barrel of beer in inventory. Moreover, inventory depletes at a constant rate of 5% from round to round Cost of goods sold Cost of goods sold (COGS) are costs directly related to the production and sale of beer, and include materials, utilities, labor, and inventory costs. We do not include transport cost in our calculation of COGS given GAAP (Generally Accepted Accounting Principles) guidelines on how to treat distribution expenses Depreciation The Property, Plant, and Equipment (PP&E) account on the Consolidated Balance Sheet tracks the book value of the brewery s manufacturing plant. The useful life of an asset is a constant term that is applied to all PP&E assets. The book value is computed using straight-line depreciation over a useful life of 25 years or 100 quarters. At the end of an asset s useful life the salvage value will be $0. We treat every addition of plant capacity as a separate transaction. Each asset or transaction has an independent cost basis, book value, and depreciation schedule. If a portion of an asset is sold before it is fully depreciated, the future depreciation schedule of the remaining asset is adjusted accordingly. When a PP&E asset is sold, we assume that the most recent asset purchased is also the first asset sold. We assume that the sale price of PP&E is less than the book value since a brewery s manufacturing assets are specific to the industry and may need to be set below market value of new assets to create liquidity. Initially, we calculate the sales price of an asset as 80% of its book value. In later rounds, however, this % may vary. As noted, the loss on the sale of assets is tracked on the income statement. Appendix A1. Choices available to breweries each round Each round, you have the following choices at your disposal: 1. PRODUCTS 2014, 2015, 2016 President and Fellows of Harvard College 12

13 Create new beers: select product features and target segment. Redesign existing beers: adjust product features and/or change target segment. Deactivate existing beers. Reactivate deactivated beers. 2. CAPACITY Add capacity to existing plant. Make downpayments on new mortgages and early prepayments of existing mortgage debt. Sell off capacity. Invest in process R&D. 3. MANUFACTURING Allocate brewing capacity to beers in the portfolio. 4. ADVERTISING Allocate advertising budget across beers in the portfolio. 5. PRICING Determine whether or not to market each beer in the portfolio. Determine whether or not to sell each beer in the portfolio. Price each beer in the portfolio. 6. PRESS Create press releases. A2. Segment profiles 1. PREMIUM Segment size. You can find the segment size (barrels per quarter) in the SEGMENT SHARES graph at the bottom of the Dashboard. Segment size may increase or decrease over time, depending on general economic conditions. Please, see the Economic News in the PRESS page. The SEGMENT SHARES graph updates accordingly. Customer benefit (WTP) spread around mean. The standard deviation of willingness to pay around the mean value is $251, approximately. Thus, customers in this segment are quite heterogeneous. The graph below plots customer preference distributions for all five segments. The distribution of Premium customers is filled in blue. Ranking of beer features and ideal values: Please, see the value proposition diagram and the highlighted beer features intervals in the PRODUCTS page. The beer features in the value proposition diagram 2014, 2015, 2016 President and Fellows of Harvard College 13

14 are listed from more to less important to this customer segment. Strength of customer preferences for Premium beers. High. Customers in this segment do not place much value on beers that target other segments. Effect of brewery popularity (cumulative sales) on willingness to pay. Premium customers have a slight preference to purchase beer from breweries with beers that target the Premium segment only. Segment marketing costs. The segment-specific marketing and promotion costs required to sell in this segment can be found at the bottom of the top-left panel in the PRODUCTS page. You can also see these in the dialog box that appears when you create a new beer. 2. CRAFT Segment size. You can find the segment size (barrels per quarter) in the SEGMENT SHARES graph at the bottom of the Dashboard. Segment size may increase or decrease over time, depending on general economic conditions. Please, see the Economic News in the PRESS page. The SEGMENT SHARES graph updates accordingly. Customer benefit (WTP) spread around mean. The standard deviation of willingness to pay around the mean value is $377, approximately. Thus, customers in this segment are very heterogeneous. The graph below plots customer preference distributions for all five segments. The distribution of Craft customers is filled in blue. Ranking of beer features and ideal values: Please, see the value proposition diagram and the highlighted beer features intervals in the PRODUCTS page. The beer features in the value proposition diagram are listed from more to less important to this customer segment. Strength of customer preferences for Craft beers. Very high. Customers in this segment detest beers that target other segments. Effect of brewery popularity (cumulative sales) on willingness to pay. Craft customers have a strong preference to purchase beer from breweries with beers that target the Craft segment only. Segment marketing costs. The segment-specific marketing and promotion costs required to sell in this segment can be found at the bottom of the top-left panel in the PRODUCTS page. You can also see these in the dialog box that appears when you create a new beer. 3. REGULAR Segment size. You can find the segment size (barrels per quarter) in the SEGMENT SHARES graph at the bottom of the Dashboard. Segment size may increase or decrease over time, depending on general economic conditions. Please, see the Economic News in the PRESS page. The SEGMENT SHARES graph updates accordingly. 2014, 2015, 2016 President and Fellows of Harvard College 14

15 Customer benefit (WTP) spread around mean. The standard deviation of willingness to pay around the mean value is $209, approximately. Thus, customers in this segment are somewhat heterogeneous. The graph below plots customer preference distributions for all five segments. The distribution of Regular customers is filled in blue. Ranking of beer features and ideal values: Please, see the value proposition diagram and the highlighted beer features intervals in the PRODUCTS page. The beer features in the value proposition diagram are listed from more to less important to this customer segment. Strength of customer preferences for Regular beers. Medium. Customers in this segment exhibit some dislike for beers that target other segments, but when the price is right they purchase beers not specifically targeted to them. Effect of brewery popularity (cumulative sales) on willingness to pay. Regular customers have a preference to purchase beer from larger breweries. Segment marketing costs. The segment-specific marketing and promotion costs required to sell in this segment can be found at the bottom of the top-left panel in the PRODUCTS page. You can also see these in the dialog box that appears when you create a new beer. 4. FLAVORED LIGHT Segment size. You can find the segment size (barrels per quarter) in the SEGMENT SHARES graph at the bottom of the Dashboard. Segment size may increase or decrease over time, depending on general economic conditions. Please, see the Economic News in the PRESS page. The SEGMENT SHARES graph updates accordingly. Customer benefit (WTP) spread around mean. The standard deviation of willingness to pay around the mean value is $185, approximately. Thus, customers in this segment are somewhat homogeneous. The graph below plots customer preference distributions for all five segments. The distribution of Flavored Light customers is filled in blue. Ranking of beer features and ideal values: Please, see the value proposition diagram and the highlighted 2014, 2015, 2016 President and Fellows of Harvard College 15

16 beer features intervals in the PRODUCTS page. The beer features in the value proposition diagram are listed from more to less important to this customer segment. Strength of customer preferences for Flavored Light beers. Low. Customers in this segment are ready to purchase beers targeting other segments. Effect of brewery popularity (cumulative sales) on willingness to pay. Flavored Light customers have a preference to purchase beer from larger breweries. Segment marketing costs. The segment-specific marketing and promotion costs required to sell in this segment can be found at the bottom of the top-left panel in the PRODUCTS page. You can also see these in the dialog box that appears when you create a new beer. 5. ECONOMY Segment size. You can find the segment size (barrels per quarter) in the SEGMENT SHARES graph at the bottom of the Dashboard. Segment size may increase or decrease over time, depending on general economic conditions. Please, see the Economic News in the PRESS page. The SEGMENT SHARES graph updates accordingly. Customer benefit (WTP) spread around mean. The standard deviation of willingness to pay around the mean value is $115, approximately. Thus, customers in this segment are quite homogeneous. The graph below plots customer preference distributions for all five segments. The distribution of Economy customers is filled in blue. Ranking of beer features and ideal values: Please, see the value proposition diagram and the highlighted beer features intervals in the PRODUCTS page. The beer features in the value proposition diagram are listed from more to less important to this customer segment. Strength of customer preferences for Economy beers. Very low. Customers in this segment will buy anything that is cheap. Effect of brewery popularity (cumulative sales) on willingness to pay. Economy customers have a preference to purchase beer from larger breweries. Segment marketing costs. The segment-specific marketing and promotion costs required to sell in this segment can be found at the bottom of the top-left panel in the PRODUCTS page. You can also see these in the dialog box that appears when you create a new beer. A3. Preference heterogeneity within segments: AWTP and cawtp To illustrate the notion that, even within a segment, customers are heterogeneous, consider the Premium segment. The following plot shows the distribution of customer benefit (willingness to pay) by customers in the premium segment for a beer that targets them: The vertical purple line ($524) is the average customer benefit (AWTP) for this beer by premium customers. 2014, 2015, 2016 President and Fellows of Harvard College 16

17 Figure 1: Distribution of customer benefit among premium customers for a beer targeting the premium segment. a Now, if this is the only beer in the market and retail price is $650 per barrel, then only customers for whom WTP is larger than $650 (the vertical dotted blue line in the following graph) will purchase the beer. The rest are better off not buying it. Graphically, only individuals in the yellow area (see figure below) purchase the beer. Figure 2: Distribution of buying customers when retail price is $650. The vertical purple line continues to be the average customer benefit (AWTP) of premium customers ($524). The new light purple line ($862) is the average customer benefit of those premium customers who actually buy the beer. In the simulation, we refer to this average customer benefit as Conditional AWTP (cawtp). Of course, Conditional AWTP changes with price. For example, if the beer is offered at a price higher than $650, Conditional AWTP increases. The following graph illustrates the case where the beer is offered at $1,050 per barrel. In this case, the light purple line (Conditional AWTP) is $1,250. Obviously, the overall segment AWTP remains Figure 3: Distribution of buying customers when retail price is $1,050. constant at $ , 2015, 2016 President and Fellows of Harvard College 17

18 A4. The waterfall diagrams The DASHBOARD and PRODUCTS pages present a number of waterfall diagrams that you may use to inform your play. Waterfalls on the DASHBOARD page At the top-left of the DASHBOARD page, you will see the WTP, PRICE & COST diagram: In this example, the brewery has three beers: C1 targeting the Regular segment, and C3 targeting the Economy segment. For each of your beers, this diagram shows: segment, C2 targeting the Flavored Light 1. The projected average willingness to pay (customer benefit) across all individuals (all segments) who are expected to purchase that beer in the current round. 2. The price at which your beer will be sold. 3. The projected average total cost (i.e., unit cost of production). It includes all variable and all fixed costs. Specifically, average total cost of production includes: average variable cost of production (material, labor, and utilities costs) plus average costs associated with operating the brewery (fixed manufacturing costs, rent and maintenance expense, investment in process technology, and the expense related to equipment and plant depreciation). Here, we can see that while C1 and C2 have positive profit margins, C3 s price is below average total cost. If you click on the bar diagram for, say, C1, you will see a waterfall diagram that breaks down cawtp and average total cost into its constituent elements: 2014, 2015, 2016 President and Fellows of Harvard College 18

19 At the top of the diagram, you can see the following indication: Beer C1 as evaluated by segment:. Note that the Regular segment is highlighted with background color. This indicates that the waterfall decomposes cawtp for customers in the Regular segment (which happens to be the target segment for beer C1). This waterfall diagram decomposes cawtp into five components and average total cost into four components: (A) Average willingness to pay of buying customers in the selected segment (cawtp): 1. Beer features: this is the perceived customer benefit due to the physical configuration of the beer as assessed by individuals in the selected segment. In the figure above, the selected segment is Regular and the height of the bar is $72.82; you can see that by mousing over the bar. 2. Beer awareness: perceived customer benefit increases with awareness about the beer and the brewery, and awareness increases with advertising. The size of this bar represents the contribution to customer benefit for the beer due to the awareness you have built up to this point in the simulation. In the figure above, the height of the bar is $25.19; you can see that by mousing over the bar. 3. Popularity: this is the perceived customer benefit due to how popular (past sales) the beer and the brewery are as assessed by individuals in the selected segment. In the figure above, the selected segment is Regular and the height of the bar is $51.04; you can see that by mousing over the bar. It is important to keep in mind that some customer segments (e.g., Craft ) dislike popular beers not targeting the craft segment. 4. Handicap: when a beer is evaluated by customers in a segment different from your chosen target segment, they experience a decrease in customer benefit. This decrease is captured by the handicap. In the figure above, the selected segment is Regular and the beer that is being displayed is C1, a beer targeting the Regular segment. Therefore, the handicap is zero in this case. If you chose to display how customers in the Flavored Light segment evaluate beer C1, you will see that the handicap for these customers is $13.99, see the waterfall diagram below. 5. Idiosyncratic taste: in Appendix A3 we explain that individuals in any given segment are heterogeneous in that they have idiosyncratic tastes that cannot be affected by brewery choices. The size of the bar Idiosyncratic taste in the waterfall diagram quantifies the contribution to average willingness to pay of buying customers in the selected segment (cawtp) by factors outside those that you control: beer design, advertising (which affects awareness), and sales volume (which affects popularity). Of course, different segments evaluate a given beer differently. If you would like to see how consumers in the Flavored Light segment evaluate beer C1, just click on the Flavored Light icon. The new waterfall looks as follows: 2014, 2015, 2016 President and Fellows of Harvard College 19

20 As you can see, in the case of individuals in the Flavored Light segment, the handicap contributes negatively to willingness to pay for this particular beer which targets the Regular segment. By clicking on the other segment icons, you can see how different segments evaluate this beer. (B) Average total cost: 1. COGS: costs directly related to the production and sale of beer, including materials, labor, and inventory costs. 2. Transport & excise: transport costs (paid when the beer is sold) and excise tax. 3. Advertising: your advertising expenditures for the selected beer divided by the number of barrels sold. 4. Other fixed costs: the portion of all brewery fixed costs allocated to this beer (except for advertising) divided by the number of barrels sold. If you click on any of the bars with a red border (i.e., Beer features, Popularity, COGS, and Other fixed costs), additional waterfall diagrams show up. For example, if you click on Beer features, you will see: Waterfalls on the PRODUCTS page The PRODUCTS page also offers a bar diagram that shows willingness to pay for the selected beer. Here, we show the graph for product C1: 2014, 2015, 2016 President and Fellows of Harvard College 20

21 Strategy Simulation: Strategic Brew It is important to note that the willingness to pay plotted here is not average willingness to pay of buying customers in the selected segment (cawtp). Instead, it is average willingness to pay in the selected segment regardless of whether these are buying customers or not (AWTP). As noted in Appendix A3, contrary to cawtp, AWTP does not change with price. We note that in this example, AWTP for beer C1 which targets the Regular segment is: customers. $63.52 for Premium ($78.35) for Craft customers. (Note that the plot does not show numbers smaller than -$50.00.) $ for Regular customers. $ for Flavor Light $ for Economy customers. customers. By clicking on any of the bars, you will open a waterfall diagram that provides details on where AWTP (customer benefit) comes from. For example, by clicking on the Economy bar, we see: Additional waterfalls show up by clicking on the bars with red borders (i.e., Beer features and Popularity). A5. Requesting control of the simulation At beginning of each round, the simulation control is reset (i.e., no team member has control). The first team member to click on REQUEST CONTROL will be granted the leader role. However, the simulation will count 15 seconds SAVE ALL before conferring control. This person will have ability to save decisions (i.e., the button will be available) to that team member. 2014, 2015, 2016 President and Fellows of Harvard College 21

22 Strategy Simulation: Strategic Brew A non-leader team member can click on REQUEST CONTROL at any time to request ability to save their decisions. The request will be automatically sent to the leader, and that person will have 15 seconds to respond with a or DENY GRANT :! Control request Another user has requested control of user team s decisions. use12b4 user from GRANT DENY If no decision is made when the timer runs out, the simulation will display the following notification and automatically switch control to the requestor:! Control taken over! New user took over team decisions control. New leader is use12b4 user on ip Ok SAVE ALL Only the team leader will be able to click on. When the leader saves decisions, other team members will need to click on in order to view the new changes. The simulation prevents nondata REFRESH leaders from requesting control until they have refreshed their data. That is, non-leaders can request control only after the leader s changes have been applied. A6. Support page & videos There is a Support Page ( that includes instructional videos offering a hands-on tour of the simulation, FAQs, the, and a Technical Manual (which is optional reading, just in case you are curious to see the model behind Strategic Brew). A7. Minimum technical requirements Internet browser requirements: Google Chrome only (32-bit or 64-bit) [Version 48.0 or most current version]. To check which version you have, click on Chrome s main menu button and choose About Google Chrome. Microsoft Windows 7 (or higher). Apple OS X (Mac) Version 10.7 (or higher). Touchscreen devices and tablets are not supported. Screen resolution 1280w x 800h (or higher). Memory recommendation 4GB or 2+ CPU cores 2014, 2015, 2016 President and Fellows of Harvard College 22

23 Optional Assignment: Dashboard Tutorial The following optional assignment will help you develop an adequate understanding of how the works. You will play as the ALEWIFE brewery. DASHBOARD Before beginning, please be sure to review the minimum technical requirements in the User Guide (Appendix A.7). If you have any questions or need technical support, please visit the Support Page ( help/brewery_support/index.html) or Please, restart the game by clicking on > RESTART at the top right of the page and go the DASHBOARD page. 1. Please, go to the Historical dashboard by clicking on the calendar icon. To indicate that the data shown are historical, the page has a darker background: Last quarter (Y2015 Q4), ALEWIFE offered two beers: A1, a beer that targets the Premium segment, and A2, one that targets the Regular segment. If you mouse over the WTP, PRICE & COST bar graph for A1, you will see that the conditional average willingness to pay (cawtp) across all individuals (all segments) who purchased that beer was $ (see Appendix A.3), average total cost was $185.98, and that it was priced at $ per barrel. If you click on the bar diagram for A1, you will see a waterfall diagram that breaks down cawtp and average total cost into its constituent elements: At the top of the diagram, you can see the following indication: Beer A1 as evaluated by segment:. Note that the Premium segment is highlighted with background color. This indicates that the waterfall decomposes cawtp for customers in the Premium segment (which happens to be the target segment for beer A1). If you mouse over the Beer features bar, you will see that customers in the Premium segment value beer A1 s beer features at $ You can also see how beer awareness, popularity, the handicap, and idiosyncratic taste contribute to cawtp for customers in the Premium segment. Of course, different segments evaluate a given beer differently. If you would like to see how consumers in the Craft segment evaluate beer A1, just click on the Craft icon : 2014, 2015, 2016 President and Fellows of Harvard College 23

24 As you can see, in the case of individuals in the Craft segment, popularity and the handicap contribute negatively to willingness to pay for this particular beer which targets the Premium segment. By clicking on the other segment icons, you can see how different segments evaluate this beer. If you click on any of the bars with a red border (i.e., Beer features, Popularity, COGS, and Other fixed costs), additional waterfall diagrams show up. For example, if you click on Other fixed costs, you will see: You can see the exact size of each bar by mousing over it. For example, selling costs per barrel of beer A1 in Y2015 Q4 were $ , 2015, 2016 President and Fellows of Harvard College 24

25 Optional Assignment Deliverable #1: Please, answer the following questions: (a) How much did Beer awareness contribute to the willingness to pay for beer A1 by customers in the Premium segment in Y2015 Q4? i. $24.93 ii. $16.38 iii. $ iv. $24.97 v. None of these (b) How much did Popularity contribute to the willingness to pay for beer A1 by customers in the Premium segment in Y2015 Q4? i. $18.40 ii. $16.38 iii. $39.25 iv. $84.66 v. None of these (c) How much did the Alcohol product feature contribute to the willingness to pay for beer A1 by customers in the Premium segment in Y2015 Q4? i. ($3.18) ii. $15.56 iii. $8.42 iv. $18.64 v. None of these (d) How much did the Flavor preservation product feature contribute to the willingness to pay for beer A1 by customers in the Premium segment in Y2015 Q4? i. ($3.18) ii. $1.59 iii. $8.42 iv. $6.90 v. None of these (e) How much did Beer awareness contribute to the willingness to pay for beer A1 by customers in the Craft segment in Y2015 Q4? i. ($55.26) ii. $16.38 iii. $24.93 iv. $24.97 v. None of these (f) How much did Popularity contribute to the willingness to pay for beer A1 by customers in the Craft segment in Y2015 Q4? i. $ ii. $24.93 iii. ($55.26) iv. ($62.94) v. None of these (g) How much did the Alcohol product feature contribute to the willingness to pay for beer A1 by customers in the Economy segment in Y2015 Q4? i. $23.28 ii. $0.79 iii. $13.34 iv. $4.59 v. None of these (h) How much did the Flavor preservation product feature contribute to the willingness to pay for beer A1 by customers in the Flavored Light segment in Y2015 Q4? i. ($3.18) ii. ($7.79) iii. $4.48 iv. $7.18 v. None of these (i) What were COGS (per barrel) of beer A1 in Y2015 Q4? i. $15.26 ii. $ iii. $ iv. $39.25 v. None of these (j) What were the Packaging costs (per barrel) of beer A2 in Y2015 Q4? i. $26.90 ii. $7.66 iii. $3.96 iv. $42.00 v. None of these 2014, 2015, 2016 President and Fellows of Harvard College 25

26 (k) What were the Segment marketing costs (per barrel) of beer A2 in Y2015 Q4? i. $33.40 ii. $1.75 iii. $4.30 iv. $19.74 v. None of these (l) What was the Advertising expense (per barrel) for beer A2 in Y2015 Q4? i. $3.91 ii. $39.25 iii. $0.65 iv. $1.83 v. None of these 2. In this part of the assignment, we continue exploring the information contained in the Historical dashboard. Optional Assignment Deliverable #2: Please, go to the Historical dashboard and answer the questions below. Recall that the Historical dashboard has background color: (a) Using the data in the PRODUCT & CUSTOMER SCOPE table, please answer the following question: How many barrels of beer A1 were purchased by customers in the Regular segment in Y2015 Q4? i. 617,884 ii. 175,663 iii. 493,813 iv. 256,560 (b) Using the data in the PRODUCT & CUSTOMER SCOPE table, please answer the following question: How many barrels of beer A2 (total) were sold in Y2015 Q4? i. 1.77m ii. 510,887 iii. 2.28m iv. 803,500 (c) Using the data in the DEMAND, BARRELS AVAILABLE & MANUFACTURING CAPACITY horizontal bar diagram, please answer the following question: What was the fulfilled primary demand for beer A2 in Y2015 Q4? i. 1,374,466 ii. 17,688 iii. 136,570 iv. 374,317 (d) Using the data in the DEMAND, BARRELS AVAILABLE & MANUFACTURING CAPACITY horizontal bar diagram, please answer the following question: What was the fulfilled secondary demand for beer A1 in Y2015 Q4? i. 394,087 ii. 17,688 iii. 136,570 iv. 374,317 (e) Using the data in the DEMAND, BARRELS AVAILABLE & MANUFACTURING CAPACITY horizontal bar diagram, please answer the following question: How many barrels of beer A1 did ALEWIFE brew in Y2015 Q4? i. 1,768,553 ii. 558,299 iii. 1,755,000 iv. 1,786,241 (f) Using the data in the SEGMENT SHARES bar diagram at the bottom of the page, please answer the following question: What was the Economy segment size in Y2015 Q4 (in barrels)? i. 9,930,941 ii. 9,908,912 iii. 5,687,885 iv. 6,438, , 2015, 2016 President and Fellows of Harvard College 26

27 3. A helpful feature of the Historical dashboard is that it not only provides detailed performance information about your brewery, but also about each of your rivals. To display the information about your rivals, please select the desired brewery at the top-left of the page: Optional Assignment Deliverable #3: Please, select CEDAR to display data on this brewery by clicking: and answer the following questions: (a) Using the data in the BEER ECONOMICS table, please answer the following question: How much value did CEDAR capture per barrel of beer C3 sold in Y2015 Q4? i. $ ii. $33.64 iii. $65.76 iv. ($2.58) v. None of these (b) Using the data in the BEER ECONOMICS table, please answer the following question: What was C3 s contribution to CEDAR s profitability in Y2015 Q4? i. $34.84m ii. $47.47m iii. ($2.58) iv. ($34.84m) v. None of these (c) Using the data in the CHANGES IN INVENTORY & DEMAND SURPLUS (SHORTAGE) table, please answer the following question: Did CEDAR manufacture sufficiently many barrels of beer C3 to satisfy demand in Y2015 Q4? i. Yes ii. No iii. Can t tell (d) Using the data in the CHANGES IN INVENTORY & DEMAND SURPLUS (SHORTAGE) table, please answer the following question: Was there any existing inventory of beer C3 at the beginning of quarter Y2015 Q4? i. Yes ii. No iii. Can t tell (e) Using the data in the SUMMARY FINANCIALS table at the bottom of the page, please answer the following question: What was CEDAR s total revenue in Y2015 Q4? i. $528,553,811 ii. $107,360,385 iii. $675,495,949 iv. $756,901,997 (f) Using the data in the WTP, PRICE & COST bar graph at the top-left of the page, please answer the following question: How much did the Alcohol product feature contribute to the willingness to pay for beer C3 by customers in the Economy segment in Y2015 Q4? i. $23.28 ii. $13.64 iii. $13.34 iv. $4.59 v. None of these 4. Another helpful feature of the Historical dashboard is that it provides an easy way to compare the performance of all beers addressing a particular customer segment. This feature can be accessed from the WTP, PRICE & COST bar graph at the top-left of the page. Please, make sure you are at the top level so that the title of the graph reads: WTP, PRICE & COST > ALEWIFE : ALL BEERS. From there, please click on any one of the five segment icons (,,,, ) to display all beers that addressed that segment last quarter. For example, if you click on the Regular segment icon, you will see the following graph: 2014, 2015, 2016 President and Fellows of Harvard College 27

28 Strategy Simulation: Strategic Brew This graph shows that in Y2015 Q4 there were four beers that targeted the Regular segment: A2, C1, D1, and E1. Thus, breweries ALEWIFE, CEDAR, DEER, and ESSEX each offered one product targeting Regular customers. As you can see, C1 exhibited the highest average total cost ($ per barrel), followed by A2, D1, and E1. By clicking on any of the bars, you will get further detail (waterfall diagrams). Optional Assignment Deliverable #4: Please, answer the following questions: (a) How many beers (across all breweries) targeted the Craft i. None ii. 1 segment in Y2015 Q4? iii. 2 (b) Which one of the beers addressing the Economy i. E2 iv. 3 v. 4 segment in Y2015 Q4 exhibited highest COGS? ii. C3 5. We will now look at the Forecast dashboard. Restart the game by clicking on > RESTART at the top right of the page and make sure you re looking at the Forecast dashboard: the page title reads FORECAST DASHBOARD and the page background is white. The Forecast dashboard contains the same information as the Historical dashboard but, contrary to the Historical dashboard which presents past performance data, most of the data that appears on the Forecast dashboard about your brewery are conjectures of what will happen when the simulation is stepped to the next round. B Important! As you change the outlook at the top of the page, all forecasts get updated. Optional Assignment Deliverable #5: Please, answer the following questions: (a) How much does Beer awareness contribute to the willingness to pay for beer A1 by customers in the Premium segment in Y2016 Q1? i. $24.93 ii. $16.38 iii. $ iv. $24.97 v. None of these (b) If you look at Other fixed costs for beer A2 when the Choose outlook selector is set to the middle, you will see $ If you change Choose outlook to the most right posi- tion change?, Other fixed costs for beer A2 become $ Why did Other fixed costs i. Because all costs go down when Choose outlook improves 2014, 2015, 2016 President and Fellows of Harvard College 28