DECISION SCREEN HELP PAGES

Transcription

1 DECISION SCREEN HELP PAGES FOR The Business Strategy Game Compiled and made available with permission from the BSG-Online authors and GLO-BUS Software, Inc. by BSG-Booster Copyright 2006 CMI Consulting, LLC. Any republication or redistribution, in whole or in part, without the consent of CMI Consulting, LLC and GLO-BUS Software, Inc. is prohibited. DECISION HELP PAGE CONTENTS Branded Sales Forecast... 2 Capacity Sales/Upgrades/Additions Branded Production Decisions Branded Shipping Decisions Internet Marketing Decisions Wholesale Marketing Decisions Celebrity Endorsement Bids Private-Label Operations Finance and Cash Flow Decisions Explanation of Performance Projections Click a link to jump to the desired section.

2 Branded Sales Forecast Help MAKING A BRANDED SALES FORECAST EXPLANATIONS INFORMATION ON RULES/PROCEDURES SUGGESTIONS AND TIPS This screen is exceptionally important and, properly used, is a very powerful tool for making shrewd decisions. It should always be your starting point for making upcoming-year decisions because the number of branded pairs you anticipate selling drives how many pairs to produce and ship. Without a reasonably reliable forecast of how many branded pairs you can expect to sell, you are not really prepared or ready to move on to entering decisions on the plant operations and shipping screens (or any of the other screens for that matter). The Logic Underlying the Branded Sales Forecast Screen While the Branded Sales Forecast screen admittedly looks complicated and requires a bunch of entries, the logic underlying the sales forecast entries is fairly straightforward: Your entries in the four columns headed Company s Marketing Effort represent tentative values for your company s marketing effort for the upcoming year in each of the four geographic regions. Think of the entries as preliminary or trial decisions that represent what if we do this to try to sell branded pairs in this region. The numbers already in these columns when you first come to the screen are the decisions your company made last year and represent the competitive marketing effort your company employed to achieve last year s branded sales volumes and market shares in each geographic region. Your entries in the four columns headed Your Estimate of the Industry Average represent your best guestimates of what level of competitive effort your company will be up against in the upcoming year they are, in other words, what you think that rivals, on average, will probably do in making their decisions this upcoming year. The numbers already in these columns for each geographic region are the prior-year industry averages, and they represent the level of competitive effort your company was up against in each geographic region last year. However, rather than entering your guesstimates for next year s industry averages item-by-item, you have the option to click on the Your Estimate of the Industry Average link which functions as the column head and go to a dialog box that expedites the process and allows you to change the industry average S/Q ratings by 1 or 2 stars and to change (with one click) all the other industry averages by some designated percentage that signifies whether the competitive efforts on the part of rivals in each region will be stronger (by +2%, +4%, +6%, etc. on up to +20%) or weaker (by 2%, 4%, 6%, etc. on up to 20%). You may find use of the dialog box to be quicker. It allows you to alter the expected industry average S/Q rating by 1 or 2 stars in either direction and experiment with different percentage changes in the other industry averages (±2%, ±4%, and so on) to see how differing levels of competitive effort on the part of rivals affects your forecasts of branded sales and market shares. Remember a positive (+) percentage change represents stronger competition from rivals in the region and a negative ( ) percentage change signifies weaker competition from rivals. Typically, you should expect competition to grow stronger rather than weaker, but there may be occasions when anticipating weaker competition in a region is reasonable. For example, there may be times when you believe companies will probably back off the use of very aggressive efforts to steal market share from rivals since such efforts have proved unprofitable; and if a number of rival companies are underperforming, you may have reason to believe their managers may be forced to initiate some price increases and/or trim back on marketing efforts so as to restore or boost their profitability (such that the industry averages will come out to represent weaker competition). As a general proposition, whether you enter projections for the industry averages one by one or (via the dialog box) change them as a group, you should normally change them in a manner that represents somewhat stronger rather than weaker competition. The methodological weakness of using the dialog box lies in assuming that all of the competitive factors will change in the same direction by the same percentage (which is, of course, quite unlikely to occur), but this assumption may still prove to yield a sufficiently close approximation to the overall competitive effort of rivals for forecasting purposes. And using this approach bypasses some of the tediousness of studying the trends in each of the industry-averages well enough to be able to make factor-byfactor projections. Plainly, the strongest methodology is to change the competitive factors individually by whatever amounts that seems apropos for each factor based on historical trends and/or the expected behavior of rivals, but whether this approach turns out to yield more accurate forecasts hinges on how closely your estimates end up being to the actual industry averages when the results are run. BSG-Booster Page 2

3 Branded Sales Forecast Help When you make all the entries in these eight columns, what you essentially have is one scenario of If our company does this and if, on average, our rivals do that, then this is about how many pairs we can reasonably expect to sell and what our approximate market share is likely to be. The forecasts of pairs sold and market share will always be in error to the extent that you end up misjudging what the upcoming year s industry averages will be. There s no question but that it is hard to come up with guestimates of whether and how much particular industry averages will change in the upcoming year. The uncertainty of what will happen to the industry averages is typically greatest in the first several years of the exercise because there s no track record to go on in judging what rivals, on average, will do but using your best judgment of what is likely to occur is better than relying on no judgment at all. At the very least, you may have good reason to believe that a majority of your company s rivals are likely to increase/decrease their prices or raise/lower their S/Q ratings or spend more/less on advertising and so on. Any time you have a basis for suspecting in what direction the industry average will move, then you have a basis for changing last-year s industry average up or down. If you and your comanagers are tempted to cut your wholesale prices or raise your company s branded S/Q rating or spend more on advertising, then other companies may be thinking of doing much the same thing for much the same reasons. But as you have more and more years of information to go on and a pattern of change emerges for some or most of the industry averages (as revealed in the Competitive Intelligence Reports and in the graphs of prices and S/Q ratings on page 7 of each issue of the Footwear Industry Report), you'll find that the accuracy of your estimates of the upcoming year's industry averages improves and that you can have more confidence in the sales forecasts. TIP: Always use the graphs on page 7 of each issue of the Footwear Industry Report as a basis for your guestimates about changes in the industry averages for Internet price, wholesales prices, and S/Q ratings. Furthermore, always use the column of industry-averages in the Competitive Intelligence Reports for each geographic region to look for trends in the movement of the various industry-averages for model availabilities, advertising, rebate offers, and so on in each region over the past couple of years to get a clue as to which direction the industry-averages for these competitive factors may be headed in the upcoming year. The Competitive Intelligence Reports, along with the graphs in the FIR, are absolutely the best data source for clues about how the industry averages might change in the upcoming year. TIP: Always use the information in the Competitive Intelligence Reports to see how your company s wholesale selling price, S/Q ratings, model availabilities, advertising, rebate offers, and so on in each region stacked up last year against the industry-average price and against the prices of your closest competitors in each region. TIP: Mine all of the information in the Competitive Intelligence Report about the actions of rival companies and use it to determine what competitive strategies that rival companies are employing. How to Proceed Suggestions and Tips for Making Good Use of This Screen You really need to do five things in making a sales forecast and using this screen to maximum advantage: 1. Make sure the pattern of values that you and your co-managers enter in your company s Marketing Effort column in each of the regions mirror the competitive strategy that you and your co-managers intend to employ. The strategy you and your co-managers decide to pursue a competitive advantage based on: Being the industry s low-cost provider of athletic footwear. Differentiating your athletic footwear from the offerings of rivals via some combination of S/Q rating, product breadth, rebates, advertising, retailer support, delivery times and celebrity appeal. Pursuing a competitive advantage keyed to more value for the money (for instance, providing 7-star footwear at lower prices than other 7-star brands). You and your co-managers can BSG-Booster Page 3

4 Branded Sales Forecast Help Pursue essentially the same strategy worldwide or else have regional strategies tailored to match the differing competitive conditions and actions of rivals in North America, Europe-Africa, the Asian-Pacific, and Latin America. Put more competitive effort into gaining sales and market share in some geographic regions than others. Strive to be the clear market leader in wholesale sales to footwear retailers or Internet sales. Make private-label footwear manufacture for chain retailers a major part of your company s business or (2) treat it as a sideline that allows you to operate plants at full capacity or (3) pretty much ignore privatelabel sales altogether. The point is that there should be some cohesive pattern to your marketing entries in each region you should avoid just entering a bunch of numbers that lack strategic coherence. Bear in mind that The Business Strategy Game is very much an exercise that involves a battle of strategies it is up to you and your co-managers to devise a competitive marketing effort that can hold its own against the strategies of rivals. 2. Run several forecasting scenarios, not just one in other words, don t just rely on a single set of entries in each of the eight columns (4 of which represent what if we do this and 4 of which represent what if this is the competitive effort we are up against ). Play around with several possible scenarios, particularly those that represent worst-case scenarios of what if competition from rival companies turns out to be stronger than we think, then how many pairs will we sell? Any time your forecasts of sales volumes and market shares for any of the four geographic regions are not to your liking (perhaps because you and your comanagers are striving for greater unit sales or a higher target market share), then you have clear feedback that your company will have to exert a more potent competitive marketing effort to capture additional sales and market share. Return to the Proposed Marketing Effort column for your company for the region(s) and make a second round of what if we do this entries (and a third or fourth round) until you come up with a competitive strategy for each geographic region that produces a projected branded sales forecast more to your liking. 3. Avoid rosy best-case scenarios where you assume that competition will prove to be no tougher and maybe weaker in the upcoming year. Making no changes in any of the industry averages and going with what happened last year means that, on average, you believe the competitive efforts of rivals will be the same as last year (a dubious likelihood). Entering a higher value for the average industry price and/or lower values for the industry-average S/Q ratings, advertising, mail-in rebates, retailer support, and so on means that you believe competition in a region will be weaker in the upcoming year that last year (also a dubious assumption). Such rosy assumption may well yield attractive forecasts of branded sales volume and market share, but if your assumptions prove wrong and competition from rivals actually turns out to be tougher than anticipated then you stand to sell far fewer branded pairs than expected and company performance is likely to come up well short of what you hoped for. 4. Use the sales forecasting screen to compare and contrast the effects on branded sales volumes and market shares of higher/lower prices, higher/lower S/Q ratings, more/less models, higher/lower advertising, higher/lower rebate offers, higher/lower retailer support, and longer/shorter delivery times. Such comparisons will give you a much better feel for which changes in your competitive effort tend to have the biggest sales/market share impacts, given the level of competition from rivals (as reflected by the corresponding industry averages). 5. Use the sales forecasting screen to test the effects on net profit of higher/lower prices, higher/lower S/Q ratings, more/less models, higher/lower advertising, and so on. For example, you can get an idea of the cost effectiveness of spending more or less on advertising by trying out different ad budgets and watching not just the changes in projected sales volumes and market share but also the changes in net profit at the bottom of the screen. If the net profit projection rises when you increase the ad budget, then the added expenditures probably represent a cost effective way to boost sales/market share. If the projected net profit falls when you increase the ad budget, then you are being signaled that the added expenditures are not cost effective even though the additional advertising boosts sales/market share. At this point don t worry about the size of the net profit number (or any of the other numbers at the bottom of the screen) because the projections of overall company performance for the upcoming year are not really indicative of year-end performance until you have entered a complete set of decisions. At this juncture, you have not made your BSG-Booster Page 4

5 Branded Sales Forecast Help decision entries. At this juncture, you have not even begun your decision entries, which means that the sizes of the year-end projections are based on prior-year decision entries that you have not updated (in other words, there s no reason to be alarmed or excited about the sizes of the projected numbers in the bottom section of the screen until you are close to a complete and final set of decision entries for all the screens). However, the incremental changes that occur when you make different screen entries are relevant in the sense that they relay the direction in which net profit is moving when you enter different values for your company s marketing effort in any region. The sales forecast screen is a very powerful tool and, in some respects, the most important of all the screens because forecasts of branded sales drive so many of the remaining decision entries. A sales forecast that proves highly erroneous, especially one that proves much too rosy in terms of how many pairs you can expect to sell, nearly always ends up adversely affecting the company s performance and creating inventory surplus problems that will have to be dealt with. Special Note: When you start making a sales forecast and have not yet been to the any of the decision screens to make decisions for the upcoming year, you should in no way be alarmed/comforted by the numbers for revenue, net profit, EPS, ROE, credit rating, and year-end cash balance that you see at the bottom of the screen. This is because the 7 projections of overall company performance for the upcoming year at the bottom of the screen are not a true indication of your company s projected year-end performance until you and your co-managers have entered a complete set of decisions. Since you have not gotten to the decision entry screens to update the decision entries, the sizes of the year-end projections at the bottom of the sales forecast are irrelevant in effect, they are based on the decision entries which were carried over from the prior year and which remain in the decision entry boxes. Clearly, you will change a number of things when you get to the decision screens. However, you can still make use of the numbers for projected year-end performance at the bottom of screen by watching the incremental changes (up or down) as you make new entries for the upcoming year. The incremental changes indicate whether the number you are entering for your company proposed marketing effort are likely to translate into higher/lower revenues, higher/lower net profits and EPS, a higher/lower ROE, a better/worse credit rating, and a bigger/smaller yearend cash balance. Thus while the sizes of the numbers for revenue, net profit, EPS, ROE, credit rating, and year-end cash balance are not particularly helpful in evaluating the pros and cons of proposed marketing effort entries, the directions of change in the numbers for revenue, net profit, EPS, ROE, credit rating, and year-end cash balance are very informative and useful in evaluating the merits of your proposed marketing effort entries and deciding whether the forecasted sales and market shares are likely to help or hurt company performance. The Sales Forecast Entries: What They Mean and How They Matter As you can see from the screen, there are 10 factors on the list of things that affect forecasted sales to retailers in each region ranging from wholesale price at the top of the list to the number of companies you expect to compete for branded sales in the region at the bottom of the list. It is worth reviewing the following discussion of the factors on this list if you have any questions about what these entries mean and how they affect sales to retailers. Wholesale Price. Price entries always have a big effect on forecasted sales and market share. The higher a company's wholesale price relative to the industry-average in a region, footwear consumers in the region will be more inclined to shift their purchases to lower-priced brands. However, the loss of unit sales that accompanies charging retailers a higher wholesale price can be partially or wholly counteracted by raising S/Q ratings, models available for sale, advertising, and so on as you can readily confirm by experimenting with higher values for such entries to see what it will take to maintain sales and market share if you raise your company s price. You can also confirm by playing around with different entries for price and the other factors affecting sales to retailers that low price alone won t attract droves of buyers. S/Q Ratings. S/Q ratings are generally the second most important factor (behind price) in shaping consumers choices of which footwear brand to purchase. So entries to raise/lower the S/Q rating will typically have a sizable sales/market share impact (as you can readily confirm by checking out the projected changes in sales/market share for 3-star S/Q and 7-star S/Q entries). Remember that the S/Q rating of shoes produced at each plant is a function of five factors: (1) current-year spending per model for new BSG-Booster Page 5

6 Branded Sales Forecast Help features and styling, (2) the percentage of superior materials used, (3) current-year expenditures for Total Quality Management (TQM) and/or Six Sigma quality control programs, (4) cumulative expenditures for TQM/Six Sigma quality control efforts (to reflect learning and experience curve effects), and (5) current-year expenditures to train workers in the use of best practices. Hence any changes in your S/Q rating entries in one or more regions will spill over to impact your production decision entries and costs. Models Available. The number of models/styles comprising your product line in each geographic region normally has a sizable impact on the branded sales forecast as you can quickly see by comparing the difference in projected sales and market share for, say, 50 models versus 500 models. However, the production-run set-up costs for adding more models is substantial, so the effect on cost per pair of making 250, 350, or 500 models available for sale in a region can be sizable. You can get an idea of the incremental cost impact by watching the changes in net profit at the bottom of the screen when you enter different numbers of models. Advertising Budget. Advertising strengthens awareness of your company s brand, helps pull buyers into retail stores carrying your brand, informs people about the features and prices of your latest styles and models, and is a vehicle for conveying celebrity endorsements (and leveraging the costs of signing celebrities to tout your brand). You can get an idea of the cost effectiveness of spending more or less on advertising by trying out different ad budgets and checking out not only the effects on projected sales volumes and market share but also the changes in net profit at the bottom of the screen. If the net profit projection rises when you increase the ad budget, then the added expenditures represent a cost effective way to boost sales/market share. If the projected net profit falls when you increase the ad budget, then you are being signaled that the added expenditures do not represent a cost effective way to boost sales/market share. Your company's market aggressiveness in advertising its lineup of models and styles in a given geographic area is a competitive plus when annual advertising expenditures exceed the region average and a competitive minus the further your ad budget is below what rival companies are spending on average. Mail-in Rebates. The size of your company's mail-in rebate offer in a given geographic area is a competitive plus when the size of the rebate exceeds the region average and a competitive minus the further rebate offer is below the average rebate offers of rival companies. Although mail-in rebates, if offered, can range from as low as $1 per pair to as much as $10 per pair, the rebate cost per pair sold is less than the face value of the rebate because some buyers lose the coupon or the sales receipt and other buyers, for various reasons, fail to take advantage of the rebate offering. The rebate redemption rates and the costs per pair are as follows: Rebate Offer Redemption Rate Cost Per Pair Sold $1 15% $0.15 $2 20% $0.40 $3 25% $0.75 $4 30% $1.20 $5 35% $1.75 $6 40% $2.40 $7 45% $3.15 $8 50% $4.00 $9 55% $4.95 $10 60% $6.00 You are free to offer no rebate if you so wish just enter a 0. Retail Outlets. The number for retail outlets shown on the screen when you first arrive represents the actual number of retail outlets your company utilized in the prior year. But the total number of retail outlets willing to stock your company s brand in this upcoming year could be larger or smaller, depending on how retailers view your company s brand given the events of the preceding year. To find out how many retail outlets are available for use this upcoming year, go to the branded marketing screen, copy down the number of retail outlets available for each region (shown in the second section of the screen) and then come back to this screen and enter the numbers in the appropriate boxes. More than likely, in making your BSG-Booster Page 6

7 Branded Sales Forecast Help branded sales forecast you will want to enter the maximum number of retail outlets available in each region, although you can experiment with entering a lesser number if you wish. The only reasons to utilize a number smaller than what is available is if you want to economize on retailer support costs or de-emphasize sales in a particular region. You can see the effects of utilizing all or some of the available retailers on branded sales volumes, market shares, and net profit by observing the on-screen calculations when you make different entries. The number of retailers in a region willing to stock your company s brand in any year upcoming is based on (1) your company s prior-year market share of branded footwear sales in that region, (2) your prior-year S/Q rating for branded footwear, (3) your prior-year delivery times in filling retailer orders, (4) the degree of support your company provided to retailers stocking your brand of footwear last year, and (5) whether your Internet price is perceived by retailers as undercutting the prices that they normally charge for your company s branded footwear, such that retailers consider your low-price Internet strategy as a direct attempt to steal away their customers a low Internet price will cause retailers to avoid stocking your brand. There s nothing you can do to secure additional retailers immediately. If you want to increase the size of your retailer network in a given region next year, then you will have to make stocking your brand more appealing to them this year by improving your S/Q ratings, market share penetration, retailer support levels, delivery times, and avoiding use of an Internet price that poses channel conflict with retailers. As with the preceding entries, the size of your company's retailer support expenditures in a given geographic area is a competitive plus when it exceeds the region average and a competitive minus the further such expenditures are is below the average retailer support levels of rival companies. Delivery Time. While retailers can live with a 4-week delivery time, you can boost the appeal of your brand and help convince more retailers to carry your brand next year by shortening the delivery times on retailer orders to 3 weeks, 2 weeks, or 1 week. Your company's delivery time in a region is a competitive plus when it exceeds the region average and a competitive minus when it is below the average delivery times of rivals. Unless your instructor has notified you otherwise, 4-week delivery costs $0.25 per pair, 3-week delivery costs $0.75 per pair, 2-week delivery costs $1.50 per pair, and 1-week delivery costs $3.00 per pair. You can see the effects of shorter/longer delivery times on branded sales volumes, market shares, and net profit by observing the on-screen calculations when you make different entries. Celebrity Appeal. As with all the entries in the Marketing Effort column, the size of your company's celebrity appeal indexes in a region is a competitive plus when it exceeds the region average and a competitive minus when the index value is below the average retailer support levels of rival companies. The numbers on the screens for celebrity appeal are a given for the upcoming year because any new celebrities signed in the upcoming year will not be available to promote your brand until the following year. There is only one reason to play around with changing the entries in the four regions: to what if the effects on forecasted sales and market share of a greater/lesser celebrity appeal index for a region. There is definitely merit in trying to learn what the possible effect on sales volumes and market shares might be should your company be successful in signing one or more of the celebrities whose endorsement contract is currently up for bidding (which you can check out by going over to the celebrity bids screen or referring to the listings in the most current issue of the Footwear Industry Report). To do some what-iffing of the contributions of one or more of the celebrities up for bid, go to the celebrity bid screen (or the most current issue of the Footwear Industry Report), copy their celebrity appeal indexes for each region on a scrap of paper, then come back to this screen and add in their respective consumer appeal indexes to the consumer appeal indexes and observe the effects on sales volumes and market share. You can use a similar procedure to see the adverse effect of losing a celebrity after the upcoming year because their contract is expiring. However, once you finish any what-iffing, you re-enter the original value for your company s celebrity appeal indexes in each of the four boxes. If you don t remember what the original numbers were, you can recalculate them by going back to the celebrity bid screen or the Footwear Industry report and adding up the consumer appeal indexes of those celebrities you have under contract. Companies Competing in the Region. Normally you will not need to make any entries in this box for any of the four regions the number that appears represents how many companies had a market presence in branded footwear in that region the prior year. Unless you have very strong reason to believe that one or more companies will pull out of a region in the upcoming year (or that companies not participating in a BSG-Booster Page 7

8 Branded Sales Forecast Help region last year will re-enter the region in the upcoming year), there s no reason to alter the entry in this box. Should you enter a smaller what-if number, you will see a positive impact on sales and market share that represents the amount of new business you are projected to pick up from the company or companies expected to exit that geographic market. Entering a larger value for the number of companies competing in a region (assuming that not all companies competed in the region last year) allows you to estimate how much business your company might lose if one or more rivals re-enters a regional market (after having abandoning it earlier). Interpreting the Sales Forecast Values The section of the screen just below the Marketing Effort and Industry-Averages columns shows the corresponding forecasts (not guarantees!) of about how many branded pairs you can expect to sell in North America and what approximate market share you can expect. Bear in mind that the sales forecast is just that a forecast. To the extent that your estimates of the industry averages for a region are off-the-mark, your branded sales forecast for that region will also be off-the-mark. On the other hand, if your estimates of the upcoming year s industry averages are close to what the actual industry averages turn out to be, then your branded sales forecasts of pairs sold and market shares will also be close to your company s actual sales and market shares. The forecasts will never exactly equal actual sales (except by chance) for two reasons: Because of the likelihood that some or many of the actual industry averages will deviate, perhaps slightly or perhaps sizably, from your estimates. Because the forecast is based on the assumption that the actual growth rate in branded footwear demand will fall at the mid-point of the projected growth interval (for instance, if the projected growth for a region is 5-7% in, the forecast is based on an assumed 6% growth) the further the actual growth is from the mid-point of the projected growth range and the closer it is to the extremes of 5% or 7%, the greater the error in the branded sales forecast. Entering Values for the Factors Affecting Internet Sales When you have made tentative branded sales forecasts for all four geographic regions, turn your attention to the top left part of the Branded Sales Forecast screen and make tentative entries for what if we do this and our rivals on average do that as concerns online sales. Projections of the number of pairs sold online are included in the branded sales forecasts for each of the four geographic regions because all orders from online buyers are shipped from the distribution center in which the buyer is located. You will need to make tentative entries for online price, models, and shipping for both your company s proposed marketing effort and your estimate of the industry-average level of effort you will be competing against. Online Price. The online price you enter, in effect, represents an average retail price for all the models that your company elects to make available for sale online. How your online price compares with the industrywide online prices of competing companies is the single most important determinant of your company s share of the Internet sales segment. The maximum allowed online price for models and styles sold at the company s Web site is $150 per pair. Use the graphs of the industry-average price for Internet sales on p. 7 of each issue of the Footwear Industry Report as guides in guestimating the industry-average Internet price in the upcoming year. Caution: You must be careful not to set an Internet price that is perceived by retailers as undercutting the prices they normally charge for your company s branded footwear. Retailers consider a low-price Internet strategy on the part of your company as a direct attempt to steal away their customers. In other words, the lower your posted Internet price in a region, the more that your marketing efforts to attract online sales in that region pose channel conflict with your marketing efforts to court retailers in the region and convince them to stock your brand and merchandise it aggressively. Retailers view your Internet price as a direct competitive threat to their business whenever your Internet price is less than 40% above the wholesale price they must pay to buy your branded footwear. The more that your Internet price falls under the 40% benchmark in a particular region, the bigger the percentage of retailers in that region who will elect not to stock your company s brand next year. Hence, you must be careful not to craft an Internet strategy that poses channel conflict with your wholesale strategy. BSG-Booster Page 8

9 Branded Sales Forecast Help Models Offered Online. Enter tentative values for the number of models your company wishes to make available for sale online, bearing in mind that the value entered becomes the minimum number of branded models you will have to maintain in those regional warehouses from which online orders will be shipped. Also enter estimates for the average number of models that you think all companies, on average, will make available for sale online refer to the Competitive Intelligence Reports for data on recent changes in the industry-average number of models offered online. The number of models your company plans to make available for sale online will prove to be a competitive plus if it exceeds the average number of models offered by all industry members and a competitive minus when it is below the average. Remember your company incurs annual costs of $15,000 for each model offered for online sale. Free Shipping. Free shipping is very appealing to online buyers and will thus have a sizable effect on the volume of pairs sold online, but the company will have to absorb the $10 cost for boxing, packaging, handling and shipping fees in the online price you ve tentatively entered. You will also have to go to the industry-average column for free shipping an indicate your estimate of whether none, some, most, or all of the companies will decide to offer free shipping (you ll have a reasonable idea of how many this might be starting in Year 12 because you will be able to determine from the Competitive Intelligence report how many companies utilized free shipping in the year prior). Now, you can play with yes/no entries on free shipping price (as well as with various entries for your online price and number of models offered) and observe the effects on the branded sales volumes and market shares in each of the four regions and the direction in which the projected net profit at the bottom of the screen is moving to decide on the merits of offering free shipping. You can easily reconsider this entry later (when you get to the Internet Marketing decision screen and have more detailed revenue-cost-profit projections for the Internet sales segment of your company s business). TIP: After entering tentative values for the six boxes, you should play around with several different scenarios for both your company s online marketing effort and various estimates for the industry average values just to see the effects on overall branded sales and market share in each region and the direction in which projected net profit is moving. It is important to remember that your company s share of total online sales in each geographic region is also a function of three region-specific factors: how your company s S/Q rating, advertising, and celebrity appeal indexes compare with those of rival sellers in each geographic region of the world market. So, your projected share of the online sales segment will be boosted to the extent that your tentative S/Q ratings, advertising budgets, and celebrity appeal indexes are above your estimates of the industry-averages for these same factors, region-by-region. Inventory Clearance Decisions The decision to clear out beginning inventory is something you should weigh carefully. It is tempting to immediately conclude that is it good to always clear out beginning inventories, but such is not always the case since there are times when you ll need some or all of the pairs in beginning inventory to help meet buyer demand in the upcoming year this is particularly true if your plants are running close to full capacity and you are wanting to further boost sales and market shares in certain geographic regions. Besides, clearance sales entail sometimes steep price discounts and could prove less profitable compared to boosting marketing efforts and selling off the inventory at the regular wholesale price. As you can see towards to the bottom of this screen, there s an assortment of calculations regarding inventories and the projected production volumes of branded pairs that will be needed to meet forecasted demand. You ve got ample information here to guide you in making a prudent judgment about the need for inventory clearance sales in one or more regions. If there s any doubt about the wisdom of having beginning-of-year inventory clearance sales, the best thing to do is to run some what-if scenarios for 0, 25%, 50%, 75%, and 100% inventory clearances (the amount of the price discount needed to clear out inventories rises with the percentage and number of pairs in beginning inventory). Then you can watch the direction of change in the net profit projections (and the other bottom-of-thescreen projections) and see which of several clearance options seems most appealing from the standpoint of yielding the biggest margin over direct costs (as reported on the screen below the inventory clearance percentage entries). BSG-Booster Page 9

10 Branded Sales Forecast Help Inventory clearances become more appealing the higher the margin over direct cost. A positive margin over direct costs means that you are collecting some revenues over and above the variable costs of producing the pairs and thus have some revenues left over to contribute to covering the fixed costs associated with the pairs cleared out (if the margins over direct costs are big enough, you may even be making a bare minimum profit on the inventory clearance sale). Normally, you can justify clearing out excess beginning inventories (above the minimums needed to meet delivery times) so long as the margin over direct costs is a positive number (obviously, the bigger the better). Inventory clearances are definitely a questionable move when the margin over direct cost is negative. A negative direct cost means the discounted price is not high enough to cover even the costs of producing the shoes (materials, labor, and so on), any associated shipping charges, tariffs, etc. hence you are not even covering the variable costs on the pairs being cleared out of inventory. While there may be a time when the pros of dumping inventory at a loss exceeds the cons, doing this on a regular basis year-after-year is pretty ridiculous you re better off not to produce the pairs in the first place (there s no way to justify repeatedly making pairs for a direct cost of $25 per pair and then selling them off in a clearance sale for $22 per pair). One or more company managers should take charge of things and put an immediate halt to such undermining of the company s performance. TIP (strong suggestion): If, as the game progresses, you and your co-managers repeatedly find it necessary to dump large amounts of excess inventory (because you are trying to run your plants close to full capacity, yet are unable to sell what is being produced at regular prices), then you should strongly consider selling the unneeded plant capacity to the merchants of used footwear-making equipment for two reasons: Such a sale allows you to recover the full book value of the undepreciated investment and thus provides a financially prudent way to escape what is otherwise an unattractive investment at a very attractive price. Selling off excess capacity and redeploying the proceeds to paying down debt (or maybe even buying back shares of stock) will almost certainly act to improve your company s net profits, EPS, and ROE. TIP: If your company is struggling to sell all of the pairs you have the plant capacity to produce, you can get a good idea of how much of your present capacity is likely to be unneeded in the upcoming years by consulting the information in the middle on page 4 of the Footwear Industry Report that shows the 4-year forecasts of market demand and indicates the balance between global supply and global demand. For instance, if there s 70 million pairs of footwear-making capacity in place and market demand is only 55 million pairs, then pretty clearly there s going to be an overabundance of industry capacity for some time to come. When Are You Finished With This Screen? Once you ve made a sales forecast you are comfortable with and at least made tentative decision regarding inventory clearances, then you are ready to move on to the 8 decision screens we suggest you tackle them in the order in which they appear on the menu at the top of the screen. You can always come back to this screen at any time and do any needed fine-tuning. It is normal, indeed necessary, to cycle through all the various screens several times to arrive at a cohesive and internally consistent set of decisions. No decision or forecasting entries are ever final until the decision deadline. BSG-Booster Page 10

11 Capacity Sales/Upgrades/Additions Help DECISIONS ON CAPACITY SALES/UPGRADES/ADDITIONS EXPLANATIONS INFORMATION ON RULES/PROCEDURES SUGGESTIONS AND TIPS This screen is used whenever you want to Sell off some of your existing plant capacity (because your company is struggling to sell all of the pairs it has the plant capacity to produce and is repeatedly having to resort to deeply-discounted inventory clearance sales to get rid of unwanted excess inventories). Institute upgrades at one or more existing plants. Add new plant capacity either by building a new plant in an area where you have no production capability or by constructing an addition to an existing plant. Self-construction of a new plant or plant additions take one year to complete thus ordering the construction of a new plant or plant addition as part of your Year 11 decision means the capacity will be available for production at the beginning of Year 12. You can also acquire added production capacity immediately by purchasing used footwear-making equipment see the Used Equipment screen in the Corporate Lobby. More details for purchasing used equipment are provided in the next to last section of this Help screen and also from the underlined blue links in the Used Equipment box that appears on your Corporate Lobby screen. At the top of the capacity sales/upgrades/additions screen is a summary of the production capacity available in each geographic area for the upcoming year. There s information about the amount of capacity your company had at the end of the prior year and the new capacity additions or purchase of used footwear-making capability that you have recently undertaken and that is available for use in the forthcoming year. Below this information are numbers showing the Capacity Available for Production in the upcoming year, Total Branded Production Needed (in pairs) based on your sales forecast entries, and Capacity Available for Private- Label Production (also based on the branded sales forecast and production capacity needed to make branded pairs. Careful inspection of all this information, along with your company s growth targets and the projected market growth in the years to come (see page 4 of the Footwear Industry Report for the 4-year demand forecasts and the present global supply-global demand balance), will help you decide whether any plant additions or sales might be prudent to consider. Special Note about the Seven Projections at the Bottom of the Screen: As you move through the decision screens to make decisions for the upcoming year, you should in no way be alarmed/comforted by the numbers for revenue, net profit, EPS, ROE, credit rating, and year-end cash balance that you see at the bottom of the screen. This is because the 7 projections of overall company performance for the upcoming year at the bottom of the screen are not a true indication of your company s projected year-end performance until you and your comanagers have entered a complete set of decisions. Since you have not gotten to many of the decision entry screens to update the decision entries, the sizes of the year-end projections at the bottom of the sales forecast are irrelevant in effect, they are based on the decision entries which were carried over from the prior year and which remain in the decision entry boxes. Clearly, you will change a number of things when you get to the other decision screens and you may well revise decision entries for the screens you have already visited. However, you can always make good use of the numbers for projected year-end performance at the bottom of screen by watching the incremental changes (up or down) as you make new decision entries for the upcoming year. The incremental changes indicate whether the number you are entering for your company proposed marketing effort are likely to translate into higher/lower revenues, higher/lower net profits and EPS, a higher/lower ROE, a better/worse credit rating, and a bigger/smaller year-end cash balance. Thus while the sizes of the numbers for revenue, net profit, EPS, ROE, credit rating, and year-end cash balance are not particularly helpful in evaluating the pros and cons of proposed marketing effort entries, the directions of change in the numbers for revenue, net profit, EPS, ROE, credit rating, and year-end cash balance are very informative and useful in evaluating the merits of your proposed decision entries for this screen and other screens and BSG-Booster Page 11

12 Capacity Sales/Upgrades/Additions Help deciding whether each new decision entry is likely to help or hurt company performance, given the other decision entries. Decisions to Sell Existing Capacity The merchants of used footwear-making equipment stand ready to purchase all or a portion of the footwearmaking equipment in any of your plants at a price equal to your company s net book value of the equipment. Net book value represents the portion of your company s original investment in the plant (including the cost of any upgrades that may have been made) that has not been depreciated; the net book value (which is equivalent to the amount of cash you will receive from the sale) is reported on the screen immediately below your entries for sale of existing capacity). You can sell an entire plant if you so desire and abandon production in that geographic area entirely. Or, you can just sell a portion of any plant at any time (always in increments of 100,000-pairs of annual footwear-making capacity). To sell any of the footwear-making equipment at any of your company s plants, simply enter the amount of capacity that you and your co-managers want to sell in the entry box for Sale of Existing Capacity all entries are in thousands. Thus if you want to sale 500,000 pairs of footwear-making capacity at the North American plant, you should enter 500 and not 500,000. The money from any capacity sale is received immediately (that is, in the year for which the decision entries are made) see the information on the line just below the entry box for Sale of Existing Capacity. You will be able the see the immediate increase in the year-end cash balance projection at the bottom of the screen, which confirms that the sale has taken place as soon as you enter the amount to be sold. Just as importantly, the capacity is lost immediately. When you enter a capacity sale number, you will see immediate downward adjustments in the regular time and overtime figures for Capacity Available for Y Production. Decisions Regarding Plant Upgrade Options There are four options for upgrading existing plants and equipment as shown below: Option A Option B Option C Option D Benefit Reduces the number of defective pairs by 50% Reduces production run set-up costs by 50% Boosts S/Q rating by 1-star Increases worker productivity by 25% Capital Investment Requirement One-time capital outlay of $2.5 million per million pairs of plant capacity One-time capital outlay of $8.0 million per million pairs of plant capacity One-time capital outlay of $7.0 million per million pairs of plant capacity One-time capital outlay of $3.5 million per million pairs of plant capacity Only one option per year may be undertaken at the same plant. A maximum of two upgrades can be chosen for any one plant. Payments for upgrade options are made the year the option is ordered and construction/installation begins. Upgrade options take effect the year after being ordered and undergoing construction/installation. No upgrades may be ordered for a new plant during the year it is being constructed. An upgrade option can be ordered for a new plant the first year the new plant is on line or any year thereafter BSG-Booster Page 12