Online Business Game

Transcription

1 Online Business Game 1 by Xavier Delcourt Xavier@HiFive.be Tell me and I forget Teach me and I remember Involve me and I learn, Benjamin Franklin

2 2 Your coach for this seminar Xavier Delcourt introduction

3 3 Register to HiFive Register as a student: : Login: student, Password: student

4 4 Course Material Available on

5 5 Learning Strategy: Learn by Doing You will learn about all aspects of business by managing a simulated business. The Marketplace Live scenario follows the lifecycle of a new product and new business (PLC). Business decisions are introduced as they become relevant in the evolution of the company.

6 6 The Objective is to Profitably Capture a Dominant Market Position Teams are placed in a entrepreneurial scenario starting a new business venture. The opposition is played by competing student teams. Team 1 Team 4 Market Team 2 Team 3

7 7 Business Teams Each team member assumes a tactical area of responsibility, these responsibilities may change during the course of the simulation: Marketing // Finance // Distribution // Production // Overall Leadership

8 Final Evaluation 8 1. Cumulative Balanced Scorecard (60%). 2. Quarter 4 presentation to Venture Capitalist (20%). 3. Final analysis / Final Quiz (20%).

9 9 Why Use a Balanced Scorecard? It is too easy to get caught up in market share and short term profits. Long term viability requires that managers also deliver customer satisfaction and invest in the future. The balanced scorecard measures both the long term and the short term. You need to take decisions until the last quarter as if you will be there forever. The best managers will be good in all scorecard areas measured.

10 Performance Evaluation: the Balanced Scorecard 10

11 11 Game Scenario You and your business partners have decided to enter the international microcomputer industry. The microcomputer industry is in its introductory stage of the product life cycle (PLC). Several other international new venture firms are entering the market at the same time. You will design and manufacture, distribute and sell these products in B2B markets using your own sales channels.

12 12 scenario

13 13 Market Segments Choice There are 3 main targets defined in the microcomputer market worldwide. You need to choose a primary and a secondary segment, these segments will be used to measure your success via the balanced scorecard.

14 14 Your Segments for the Scorecard Choose segment 1 as your primary segment, and segment 2 as your secondary segment. The market share in these segments will be used to calculate your Market Performance.

15 15 Your Segments for the Scorecard

16 16 Market Segments Choice You may develop all segments, depending on how strong you are in the game, it is all about timing. But the Balanced Scorecard will take into account the 1 st and 2 nd Priority you defined in your Target Segment.

17 17 Equity Financing (Q1 Q3) The initial capitalization is 4milj. which is being invested by the executive team over the first 3 quarters; 2milj. in Q1 and 1milj. in Q2 and Q3. The executive team (you) owns 100% of the company by the end of Q3. Additional shares of stock will be issued to Venture Capitalist(s) in exchange for up to 4,5milj.. The initial stock value is then 100/share, VC s could offer between 75 and 125 per share.

18 18 Debt Financing (Q4 and Beyond) The bank will extend a line of credit to the executive team equal to one and a half times the firm's equity position in the previous quarter. The bank is highly risk adverse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.

19 19 Special Financing Needs The bank is intolerant of poor financial management. If a firm ends a quarter with a negative cash position, a loan shark by the name of Guido will offer an emergency loan to cover the firm's checking account.

20 20 Special Financing Needs Having Guido will unexpectedly dilute your own shares in the company!

21 21 Guido s Financing Terms Guido requires repayment in the next quarter. The emergency loan interest rate is a sliding scale which begins at 10% per quarter and may go as high as 25% per quarter. For each 100 which Guido places in your checking account, he will take one share of stock in your firm. The issuing of stock to Guido causes a dilution of your stock value and your share of the company, and you will lose credibility towards commercial banks and venture capitalists.

22 22 Bankruptcy A firm is technically bankrupt if its cumulative losses exceed its equity investment.

23 23 interface

24 24 Chronology of Events Q1: Organize the team, name the company, analyze market information, establish strategic direction and set up shop (design brands, open a sales office and/or international web center, and define the new factory fixed capacity). Q2: Test your brands, prices, ad copies, media placements, sales staffing, and internet tactics (if any). Determine a compensation package for employees and production schedule for each brand. You will have your first sales in Q2.

25 25 Chronology of Events Q3: Study end user feedback based on your first sales, competitive tactics, employee productivity, factory operations, and financial performance and adjust strategy.

26 26 Chronology of Events Q4: Perform a comprehensive strategic analysis and prepare a plan for the second year of business. Present the analysis and financial request to (a) venture capitalist(s). Q5 Q6: Initiate international roll out campaign, grow and optimize your cost structure.

27 27 Financial Statements: Balance Sheet The balance sheet shows all the assets, the equity and the liabilities of your company. The balance sheet will be become important in Quarter 4 when investors line up and banks offer you loans. The more loans, the higher your financial risk will be (Guido s money is also a loan).

28 28 Financial Statements: Income Statement The income statement shows the revenues, the cost of goods (production), the Gross Profit (Margin), the operational expenses and operating profit. The bottom line (income) allows you to calculate the earnings per share, the latter is important for the investors. The more shares in the company the lower the eps. The income statement will become important to watch starting Quarter 4.

29 29 Financial Statements: Cash Flow The cash flow statement is very important through all quarters, but especially in the first quarters. You will need to simulate your cash flow position with worst case/best case scenario planning.

30 30 Quarter 1: Setting up your company

31 31 How to use Market Research Data Discover how important it is to use market data and competitive signals to adjust the strategic plan and more tightly focus business tactics. Act as if you have no prior opinion on the subject, but translate available data into decisions.

32 32 Analyze Market Information

33 33 Analyze Market Information

34 34 Analyze Market Information

35 35 Analyze Market Information Maturity Decline Growth Introduction Q1 Q2 Q3 Q4 Q5 Q6 Q7... Play as if forever...

36 36 Human Resources This information won t have an influence on the result of the game, it is for your team to help organise.

37 Make To Order (MTO) / Build To Order (BTO) Managing your factory Fixed capacity versus Operating capacity 37

38 PRODUCT Brand Management 38 Develop 1 or 2 brands, to test how customers react. Each brand should address a strategic segment. WARNING: improve brands, if 60% of the name is the same then the game will see this as the same brand but improved!

39 PRODUCT Brand Management 39 Are more features always better? More features results in higher component cost. You need to offer what the customer expects, maybe a little more to be able to price high enough to generate margin, depends on the competition. You will receive information about cost of production in Q2. In Q3 you will receive information about the competition of you buy market research (only information that is public, no info about cash flow, ).

40 40 PLACE Sales Channels You may choose to sell your brands through a direct sales channel using sales executives selling to B2B. Or Open a Web Center that will sell to B2B clients worldwide. Or do both. Watch out, opening offices has 1 quarter delay.

41 41 Sales Offices Choices You will have to deploy your business on a worldwide basis, fast enough, but not too fast, using your available resources wisely, but hopefully faster than the competition.

42 42 Help during the Game The Help contains massive amount of information, for instance about developing brand

43 43 Help during the Game Watch your inbox for additional information.

44 44 Quarter 1 decisions Q1: Organize the team! Name the company. Analyze market information. Establish strategic direction and open a sales office and/or international web center. Design brand(s). Define the new factory fixed capacity. Submit before xxhxx and attend debrief here.

45 45 Quarter 2: Go to Test Market

46 46 Quarter 2: Go to Test Market The Goal in Q2 is to Maximize Learning and Not Profits. Profit comes later (Q4 Q6).

47 47 Quarter 2: Go to Test Market Set selling prices and rebates Develop advertising campaign(s) Design 2 ads, one for each brand Determine number of placements per ad Develop sales channel(s) Hire sales force for quarter Open new sales outlets for Q3

48 48 Quarter 2: Go to Test Market Schedule production Forecast demand Set operating capacity Set desired ending inventory Run factory simulation, check numbers Contract for market research on customers and competition Check pro forma financial statements

49 49 You are a Market Maker, not a Market Taker The Market is not waiting for you to take their orders. You must activate the market: Sell brands (products) that Customers want at a price they are willing to pay Locate sales channels (place) with the largest number of Customers Inform and persuade Customers to buy a PC through advertising (promotion) Hire Sales People to find Customers and persuade them to buy your PC

50 PRICING 50

51 51 In the Beginning, You Will Not Be Able to Price Above Your Costs There are many startup costs which will exceed your revenues. Your production volumes will be very low, resulting in high per unit costs.

52 52 Lots of Startup Costs Costs to setup and grow the business Profit 0 Time

53 53 Revenues Will Fall Below Costs at Outset of New Business Costs to setup and grow the business Revenue Profit 0 Time

54 Profits Will Come Later 54 Revenue Costs to setup and grow the business Profit Profits come later 0 Free cash flow You are here You are trying to get here Time Break-Even exercise

55 55 What is the Market s Price Response Function? Price elasticity Your Demand Inelastic (price is not a big factor) Elastic (demand drops fast with increasing prices) Your Price

56 56 A Differential Advantage Can Reduce Price Elasticity! Your Demand Less Elastic Elastic Differential Advantage shifts the demand curve and reduces price elasticity Price premium for your brand

57 57 How Will the Market Respond to Competitor Prices? Your Demand Low competitor prices will kill your demand Competitor s Price

58 PROMOTION - advertising 58

59 59 How to Create Ads? Your Ad Low price Easy to use More productive Fast Office applications Picture office workers Most important Least important Order of priority implies importance of message to customer Order of priority tells the ad agency what to stress in the ad

60 60 How Much to Say in an Ad? Listing the Number of Benefits Which response function is at work? Hot Hot Cold More is good to a point and then ceases to add excitement OR Cold More adds value to a point & then takes away value Less More Less More

61 61 How Much to Say in an Ad? Listing the Number of Benefits Which response function is at work?

62 62 How Often Do You Advertise? Your Demand Diminishing returns Too little Number of ads

63 63 But it Also Depends on What Your Competitors Do Your Demand Strong competitor advertising will steal away your customers Competitor s Advertising

64 SALES EXECUTIVES 64

65 65 How Many Sales People? Diminishing returns Your Demand Too many Too few Number of sales people

66 66 The Response Function is Dynamic! Your Demand Shift the Response Function upwards with better brands, prices, advertising, web tactics, sales force placement, and compensation. Number of sales people

67 67 Sales Force Compensation You need to be competitive of course, it easy to overcompensate your sales people, you need to watch the bottom line of course. Salaries will be one of the biggest cost in Q6!

68 68 MANUFACTURING

69 69 Projecting Demand: build/make to order The plant manager checks the warehouse every day to determine the rate at which each brand is being pulled out of the warehouse.

70 70 Projecting Demand: build/make to order The manufacturing plant will produce what is demanded nothing more, well just the extra ending inventory you ask for.

71 71 Managing Inventories and Cash: The Razor s Edge High production Lower unit production costs Risk of too much inventory Uses up large volumes of cash Risk of brand obsolescence (wrong product in warehouse), better when you know that your brand will still sell next quarter, maybe at lower price (BCG ). Low production Low cash requirements Higher per unit production costs Risk of too little inventory Stock outs // Lost revenue // Customer ill will (unhappy customers)

72 72 Projecting Demand Sales people will probably sell between 30 and 100 units each (can be much more up to 250 depending on the market situation). Demand is a function of market potential of the segment and the market along with the quality of marketing (4P s) decisions. On average, sales people will sell 50 units each for the entire quarter (don t trust this number, can be anything).

73 73 Projecting Demand

74 74 Managing Inventories and Cash: Use your extra capacity

75 75 Managing Inventories and Cash: Unwanted Inventory

76 76 Projecting Demand: operating capacity

77 77 Projecting Demand: factory simulation

78 Projecting Pro Forma Cash Flow Enter all decisions: The financial component of each decision will be posted to the Pro Forma Cash Flow. Run the factory simulation: The simulator will estimate production costs and revenues. Load data into the Pro Forma Cash Flow. Check the ending cash position: A desired ending cash position would be $500,000 or more. Prepare a pessimistic scenario. Reduce demand by 50%, keeping all the other expenses the same Rerun the factory simulation Reload the Pro Forma Cash Flow For this pessimistic scenario, the ending cash position should be $300,000 or more. Prepare a worst case scenario. Set demand at 25% of planned Look at the numbers, how bad would it be? 78

79 Pro Forma Cash Flow 79

80 80 Managing your factory: Fixed capacity versus Operating capacity

81 81 Quarter 3: Adjust your Strategy

82 82 Business Team Each team member assumes a tactical area of responsibility, roles will change during the simulation: Brand Management // Advertising Sales office management // Overall Leadership How to organize the work? All look at one screen and make decisions will work until Q3, after that you need to take separate responsibilities.

83 83 Now is the time! To organize your TEAM!!! Responsibilities Distribute the tasks Work separately on offline data Come back together and decide Check decisions versus input in the system Check decisions versus your plan It will only go faster from now on!

84 84 Q3: Conduct a Strategic Analysis Check customer reaction to brands, prices, and advertising Check production operations Check out competition strategic direction tactics market s response

85 85 Q3: Skillfully Adjust Strategy As needed, adjust strategy // brand designs and prices // advertising sales management // production plan Check level of cash to invest Feed decisions into Marketplace Live simulator Market Size versus # Sales

86 86 Measures of Customer Satisfaction Brand judgment (0 to 100) Price judgment (0 to 100) Ad judgment (0 to 100) 100 indicates complete satisfaction. 70 would be a good brand or advertisement rating until new technology is available in Quarter 4. Price ratings should be near

87 87 Goal of Monitoring Customer Satisfaction Give the customer what they want and do so better than the competition. 1 brand 1 ad for all (mass marketing) 1 brand 1 ad per segment (targeted marketing) Multiple brand per segment Multiple ads per brand Financial Ideal = 1 brand = low cost per unit Marketing Ideal = 1 brand per client = high cpu

88 88 Based on Customer Feedback, Skillfully Adjust Marketing Tactics Revise brand designs or create new ones // Revise ad copy Adjust prices // Hire more sales people or deploy differently Add or take away elements to find the sweet spot in the customer s response function.

89 89 Competitor Benchmarks Brand and ad designs // Prices and sales priorities Sales strategy // Sales staffing // Ad placements Demand by brand by segment Human resources // Manufacturing

90 90 Goals of Competitive Benchmarking Reverse engineer the strategy of each competitor Determine who is a threat and who is not Determine strengths and weakness of competition Emulate good decisions Predict direction of competitive moves Adjust strategy and tactics in reaction to competitor strengths and weaknesses and in anticipation of future moves.

91 91 Quarter 4: Planning the future

92 92 What s New In Quarter 4? Feature R&D // Debt (Bank Loans) // Risk Capital investments // Licensing Control charts // Tactical plan

93 93 Securing Plans for the Future: Final Strategies

94 Fine-tune your Marketing Mix 94

95 Segmentation and the PLC mass marketing targeted marketing micro-marketing 95 price performance

96 96 Goals of Financial Management Discover which brands, markets, and business functions are making the greatest and weakest contribution to the bottom line. Deploy resources to correct weaknesses and take advantage of strong performers.

97 97 Financial Performance: activity based costing Firm profitability // Brand profitability Return on investment // Asset management // etc...

98 98 Measurement of the Firm s Performance The Balanced Scorecard

99 99 Why Use a Balanced Scorecard? It is too easy to get caught up in market share and short term profits. Long term viability requires that managers also deliver customer satisfaction and invest in the future. The balanced scorecard measures both the long and short term. The best managers will be good in all areas measured.

100 100 What Do You Do When Cash And Net Income From Current Operations Are Not Sufficient To Fund New Business Development? Expand owners equity (bring in new investors) Leverage your investment (borrow money from others) Refer to the balance sheet equity and liability

101 101 New Funding Options Sell part of the company to venture capitalists venture capitalists are willing to invest up to 4,500,000 venture capitalists may ask for up to 60% of the company in exchange for their investments OR/AND Borrow money

102 102 Procedure for the Venture Capitalist Meeting Each venture capitalist will quickly assess the risk of an investment in each team and decide the amount to invest and the price at which he/she is willing to buy stock. Each venture capitalist can invest up to 4,500,000 per team. Investors are encouraged to consider a stock price between 70 and 125 per share. The venture capitalists are independent investors, they do not have to agree.

103 103 Venture Capitalist Investment The +/ 4,000,000 in common stock you will receive needs to be taken into account in your financial projection. Your Teacher will adjust the amount of stock and stock price paid by each investor after they have made their decisions.

104 104 What is Venture Capitalist? A company that consolidates investment money from diverse sources, to invest in start ups. 1. You need a great idea 2. Show referrals 3. Strong management team 4. Invest all you have 5. Show aggressive growth 6. Exit strategy +/ 3 years (value)

105 105 Venture Capitalists Want a Plan Present your team How much did you invest? Your sales up till now Q1 Q3 Your income statement Q4 Q6 Capital needed Price per share Earnings per share in Q4 Q6

106 106 Project Revenue (refer to online sheet) Historical Q1 Q2 Q3 Future Q4 Q5 Q6 Beginning Cash Balance 0 13,680 12, , ,106 2,234,341 Receipts from Operating Activities Revenues + Licensing Income + Other Income + Interest Income ,680 6, ,100 2,542,480 5,325,162 12,681, = Total Receipts from Operations 13,680 6, ,100 2,542,480 5,325,162 12,681,800 Production + R&D + Quality Cost + Licensing Fees + Advertising Disbursements from Operating Activities 0 595,215 1,160,403 2,383,428 5,682, , ,00 185,000 2,451, , , , , , , , , ,148

107 107 Financial Performance: horizontal analysis

108 108 Fast Eddy Venture Capital Fund The venture capitalists may not give you all the money that you request if they are worried about the balance of the risk and reward of your plan. To make up the difference, the Fast Eddy Venture Capital Fund will be contacted. Fast Eddy will invest the balance of what is needed at 10/share less than the lowest share price in industry.

109 109 How to know how much capital you received?

110 110 You may ask for bank loan. The bank will extend a line of credit to the executive team equal to one and a half times the firm's equity position in the previous quarter. The bank is highly risk adverse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.

111 111 You have too much cash?

112 112 Good Luck with Q5 & Q6

113 113 Venture Capitalist investment: catches

114 114 Cumulative Balanced Scorecard The scorecard from quarter 3,4,5,6 cumulated will count as the final measurement for the success of your executive team.

115 115 Someone in your team should specialize in the Score Card sience.

116 116 Lets celebrate?

117 117 or not?

118 118 Online Business Game by Xavier Delcourt