The Capstone Class for students graduating at American University this spring used Management Simulations Inc which is a computer simulation of a publicly traded manufacturing plant that competes against several other firms in the same industry of making sensors. There were 6 groups and I was on the Ferris team. Everyone was divided up into different roles within the organization. My role was to share R&D with Zia and to be the VP of Finance since I was the only Finance major in our group. Our professor asked us as a question on our final exam to consider the strategy of our team and describe R&D, marketing, production, finance, and human resources in using this strategy. Below is a description of what took place and what I would have done differently in the future:
Strategy of our Company
I was supposed to share R&D with Zia and solely was in charge of Finance. I found that it was impossible for me to do the Finance page without doing a “mock up” simulation for all the sections for each year so that I would have “real numbers” to work with for when we worked as a group. This really exposed me to a lot of the sections of the simulation. Since I was in charge of these two sections I have put together a set of the decisions here.
Our company originally focused on only the “size” and “traditional” markets of the simulation choosing to ignore and delete the “performance” and “low-end markets”. We were going to create a niche and dominate a certain section through both price and an incredible, high quality product and add more lines. Unfortunately, this backfired on us and we did very poorly. We revisited our strategy and changed it to include all four markets, did not include a new line, and gave up having the most competitive price, but did maintain having a premium product. We changed the prices to insure that we had a minimum contribution for each line of 30%.
R&D
I co-chaired this position with Zia and we usually always put my numbers into the simulation. We mistakenly used only $1 Million for our budget in R&D. Later we figured out that we could use up to $1 Million for each line totaling a ceiling of $4 Million for each year. Upon this discovery we became much more competitive with other teams in terms of the type of product that we were offering and turned out the finest products in the class.
We used the courier as a guide post for making “decisions”, but also looked at what other companies were offering and took the product to the highest design level without leaving its market.
Marketing
Initially we tried to get into a price war with other companies, but this did not serve us well at all. We ended up setting our price where our contribution margin would be 30%. This was not always achieved, but we did strive to keep it at that level.
The marketing was a challenge since we had done so poorly financially in the beginning which did not give us enough money to market our product. We were very conservative through the first half of the simulation in marketing until our cash flow allowed us to be more aggressive.
We balanced out a budget for both promotion and sales. This was very complicated as each section was so specified. We ended up finding the strength of each market and placing a good amount of money where a specific strength was and gave no money where there would be little impact to our market.
Production
We did not do any automation because we ran into financial problems and lack of cash. In the future we would have automated more, but I know we made the best decision for our group at that time considering the level of debt we were in.
We were over-confident in the first round and had made more product than we were able to sell which really hurt us. From that point forward we only produced about 100 more units each year than we had sold from the previous year as we decided that it was better to “stock out” than be overstocked.
Finance
I was in charge of Finance and co-worked R&D with Zia. I found that keeping our cash reserves between 12-18,000 kept away the loan shark “Big Al”. Anything above that cash limit was used to slowly pay off our bonds at a rate of about $20 Million at a time or excess cash would used for company investments, but usually it went to paying off the bonds. Initially when we had money problems I did have to go to the marketing department and negotiate their spending. This was painful, but it seemed to be the only option. Later I let marketing know that they could spend as much as they wanted once the cash flow problem had been solved.
I did not pay any dividends to the stockholders as I wanted to increase the value of our stock like IBM and make holding the stock more of an investment than being paid to hold it through dividends like a “Utility stock.”
Human Resources
We did a lot of training and recruiting. This seemed to become expensive, but was well worth it. We also reduced some labor costs by investing in TQM (Total Quality Management). We paid our employees market rate wages to avoid labor problems with the union.
How the strategy worked and what you would do differently next time?
The strategy didn’t work so well since we clearly had to shift gears quickly. The changed strategy served us well and our stock as it began to increase and we became very profitable later on. As our cash flow increased we were able to increase investments in marketing and other areas of improvement. Our stock price went up and our bond rating was great – AAA!
I was given the opportunity to try it again differently through a follow up simulation for the final exam, but this time with four rounds. I really learned a lot from that final as well. I used more automation which brought down the materials costs significantly. I continued to keep the contribution margin at about 30%, but in this different environment I found that to be a mistake and learned further through this simulation that I needed to increase my contribution margin further which means that I would need to also increase the prices of my products.
I was not sure if I should continue to turn out a “premium” product for all niches, but I found that when I did it served me better to keep the products the best quality for each niche. So I learned from this “extra chance” that next time I would keep good quality products that command a high price. I would also increase my contribution margins.
I spent a lot more on marketing and I felt that paid off well and would do it again in the future. I was too conservative with my sales projections and would probably risk producing more goods than being “sold out” most of the time. This last time we competed against the computer, but I liked competing against real people – it made it more realistic and surprising with human choices and strategies. This was a lot of fun!
Part of the extra simulation was a exam which I did not feel represented the simulation. I did not like that part, was not reflective of what I had learned, and was more of a chore if anything. I feel that this part should be removed as it is not a true measurement of the simulation. It was only busy work and not worth my time. I found this part disappointing.
Strategy of our Company
I was supposed to share R&D with Zia and solely was in charge of Finance. I found that it was impossible for me to do the Finance page without doing a “mock up” simulation for all the sections for each year so that I would have “real numbers” to work with for when we worked as a group. This really exposed me to a lot of the sections of the simulation. Since I was in charge of these two sections I have put together a set of the decisions here.
Our company originally focused on only the “size” and “traditional” markets of the simulation choosing to ignore and delete the “performance” and “low-end markets”. We were going to create a niche and dominate a certain section through both price and an incredible, high quality product and add more lines. Unfortunately, this backfired on us and we did very poorly. We revisited our strategy and changed it to include all four markets, did not include a new line, and gave up having the most competitive price, but did maintain having a premium product. We changed the prices to insure that we had a minimum contribution for each line of 30%.
R&D
I co-chaired this position with Zia and we usually always put my numbers into the simulation. We mistakenly used only $1 Million for our budget in R&D. Later we figured out that we could use up to $1 Million for each line totaling a ceiling of $4 Million for each year. Upon this discovery we became much more competitive with other teams in terms of the type of product that we were offering and turned out the finest products in the class.
We used the courier as a guide post for making “decisions”, but also looked at what other companies were offering and took the product to the highest design level without leaving its market.
Marketing
Initially we tried to get into a price war with other companies, but this did not serve us well at all. We ended up setting our price where our contribution margin would be 30%. This was not always achieved, but we did strive to keep it at that level.
The marketing was a challenge since we had done so poorly financially in the beginning which did not give us enough money to market our product. We were very conservative through the first half of the simulation in marketing until our cash flow allowed us to be more aggressive.
We balanced out a budget for both promotion and sales. This was very complicated as each section was so specified. We ended up finding the strength of each market and placing a good amount of money where a specific strength was and gave no money where there would be little impact to our market.
Production
We did not do any automation because we ran into financial problems and lack of cash. In the future we would have automated more, but I know we made the best decision for our group at that time considering the level of debt we were in.
We were over-confident in the first round and had made more product than we were able to sell which really hurt us. From that point forward we only produced about 100 more units each year than we had sold from the previous year as we decided that it was better to “stock out” than be overstocked.
Finance
I was in charge of Finance and co-worked R&D with Zia. I found that keeping our cash reserves between 12-18,000 kept away the loan shark “Big Al”. Anything above that cash limit was used to slowly pay off our bonds at a rate of about $20 Million at a time or excess cash would used for company investments, but usually it went to paying off the bonds. Initially when we had money problems I did have to go to the marketing department and negotiate their spending. This was painful, but it seemed to be the only option. Later I let marketing know that they could spend as much as they wanted once the cash flow problem had been solved.
I did not pay any dividends to the stockholders as I wanted to increase the value of our stock like IBM and make holding the stock more of an investment than being paid to hold it through dividends like a “Utility stock.”
Human Resources
We did a lot of training and recruiting. This seemed to become expensive, but was well worth it. We also reduced some labor costs by investing in TQM (Total Quality Management). We paid our employees market rate wages to avoid labor problems with the union.
How the strategy worked and what you would do differently next time?
The strategy didn’t work so well since we clearly had to shift gears quickly. The changed strategy served us well and our stock as it began to increase and we became very profitable later on. As our cash flow increased we were able to increase investments in marketing and other areas of improvement. Our stock price went up and our bond rating was great – AAA!
I was given the opportunity to try it again differently through a follow up simulation for the final exam, but this time with four rounds. I really learned a lot from that final as well. I used more automation which brought down the materials costs significantly. I continued to keep the contribution margin at about 30%, but in this different environment I found that to be a mistake and learned further through this simulation that I needed to increase my contribution margin further which means that I would need to also increase the prices of my products.
I was not sure if I should continue to turn out a “premium” product for all niches, but I found that when I did it served me better to keep the products the best quality for each niche. So I learned from this “extra chance” that next time I would keep good quality products that command a high price. I would also increase my contribution margins.
I spent a lot more on marketing and I felt that paid off well and would do it again in the future. I was too conservative with my sales projections and would probably risk producing more goods than being “sold out” most of the time. This last time we competed against the computer, but I liked competing against real people – it made it more realistic and surprising with human choices and strategies. This was a lot of fun!
Part of the extra simulation was a exam which I did not feel represented the simulation. I did not like that part, was not reflective of what I had learned, and was more of a chore if anything. I feel that this part should be removed as it is not a true measurement of the simulation. It was only busy work and not worth my time. I found this part disappointing.
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