StratSim

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StratSim

• The Business Strategy Simulation

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Why a Simulation?

• I hear and I forget
• I see and I remember
• I do and I understand

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The StratSim Environment

• Simulated marketplace of 150 million people
• Exhibits normal market behavior
• Low GDP and inflation growth rates
• Demand sensitive to GDP, interest rates, and
  decisions that you make as an industry
• Maximum of 10 yearly decisions
• Based on the Automobile Industry

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The Industry

• Starting Situation 5 Firms (A-E) with 3
  vehicles in different product classes
• Firms have different strengths and weaknesses
• 7 Classes (E)conomy, (F)amily, (S)ports,
  (L)uxury, (M)inivan, (U)tility, and (T)ruck

• Awesome Cars (A)
• Best Motor Works (B)
• Cool Cars (C)
• Driven Motor Co. (D)
• Efficient Motors (E)

? Alec (E), Alfa (F), Awesport (S) ? Beaut (L),
Boffo (F), Buzzy (S) ? Cafav (F), Camini (M),
Climax (L) ? Defy (F), Delite (E), Detonka (T) ?
Evan (M), Estruck (T), Euro (U)
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The Industry

• 5 consumer segments (1-5) with different needs
  and class preferences
• Customer Intersection of segment and class
• (e.g. 1T is a value seeker who wants a Truck)
• New customers may emerge

• Segments
• Value Seekers (1)
• Families (2)
• Singles (3)
• High Income (4)
• Enterprisers (5)

Customers 1E, 1T 2E, 2F, 2M 3S, 3T 4L, 4F 5L, 5U
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The Industry Summary
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The Products Cars Trucks

• Principal Characteristics
• Size
• Engine / Performance
• Interior - And - Price
• Styling
• Safety
• Quality

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Consumer Purchase Process

• Customers have different needs and expectations
  with regard to these characteristics
• Customer consideration set based on product
  class, size, and MSRP

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Consumer Purchase Process

• Customers prefer a particular size vehicle
• Customers prefer a specific engine size due to
  the trade-off between performance and fuel
  economy
• Customers prefer better (more) Interior, Styling,
  Safety, and Quality
• Customers weigh this bundle of goods against the
  price charged

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Decisions

• Marketing
• Distribution
• Production
• Finance
• Product Development/RD

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Marketing

• Corporate Level Advertising and Public
  Relations
• Budget set by region (North, South, East, West)
  to create general firm preference and support
  dealerships
• Public Relations to create interest in firm
  developments
• Direct Mail to different consumer segments

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Marketing

• Product Level Advertising and Promotion
• Advertising budget to build and maintain
  awareness
• Advertising theme (performance, interior, style,
  safety, quality) to appeal to target segments
  hot button
• Promotion budget to help spur sales during slow
  periods used for rebates, special financing,
  attractive leases, etc.

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Marketing

• Product Level Pricing
• MSRP Manufacturers Suggested Retail Price used
  to position vehicle, set expected price
• Dealer Discount - discount to dealer
• Actual selling price determined by dealer
• MSRP - discount Actual revenues to your firm

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Distribution

• Dealerships make the actual sale to consumer
• Set up on a regional basis (North, South, East,
  West)
• Can open or close dealerships (max of 10 change
  each year and takes 1 year to open/close)
• Dealer ratings (1-100 scale) indicate customer
  experience at dealership
• Profitability and product offerings impact this
  rating
• Training and education may improve it as well
• Consider impact of dealer discounts and vehicle
  servicing

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Production

• Firm production capacity
• Total vehicle production must be less than
  capacity or incur over-capacity charges
• Capacity may be increased, but takes one year
  before available and costs
• Maximum increase (or decrease) in a year is 50
  of current capacity

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Production

• Product production
• Set production based on YOUR sales forecasts and
  inventory levels
• Retooling costs for initial or increased
  production
• Remember there is a cost to dispose of inventory
  of old vehicles

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Finance

• Uses of cash (long-term investment decisions)
• Technology, product development, capacity,
  retooling, advertising, distribution, repurchase
  of bonds and stock, repayment of loans.
• Sources of cash
• Operations, selling bonds and stock, short-term
  borrowing
• Use Pro-Forma to see likely impact on cash
  position based on YOUR forecasts and decisions

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Financial Performance

• Financial Statements (Income statement, balance
  sheets, cash flow)
• Stock price and bond ratings
• Use Pro-Forma to see likely impact on performance
  based on YOUR forecasts and decisions

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Product Development/RD

• Firms invest in technology and development
  capacity that impact overall firm performance and
  product development capability Technology
  Capabilities
• Firms provide guidance to RD through specific
  development proposals and choose which proposals
  to develop into platforms for future products -
  Platform Development

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Technology Capabilities

• Each firm has an overall technology capability
  with regard to Interior, Styling, Safety, and
  Quality that can be improved through investment
  in technology capability
• A firm with greater technology capability can
  produce vehicles with better features in these
  areas AND produce vehicles with the same features
  at lower costs

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Technology Capabilities

• Additional technology dimension is development
  capacity that determines the following
• Maximum of projects in a firm may have under
  development concurrently development slots
• In period 1, this value is 3, but can be
  increased
• But, all of these investments are expensive!

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Platform Development

• 3 General Approaches
• Upgrade Platform Based on existing platform
  can be done continuously
• - 1 Year
• New Platform New platform, but in a product
  class where the firm has an existing platform
• - 2 Years
• New Class New platform, new to product class
  for the firm
• - 3 Years

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Proposals and Platforms

• Within a given period, firms submit their own
  development proposals to RD RD analyzes them
  the firm then select from these proposals the
  one(s) to develop further
• The quality of the proposals improves as the firm
  develops experience in a particular class
• A firm may accept for further platform
  development only that number of proposals as it
  has capacity available for platform development -
  open development slots

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Proposals and Platforms

• For example
• If, in the first period, a firm initiates an
  upgrade, a two year project (new platform), and a
  three year project (new class),
• Then, in the next period, the firm submits
  multiple proposals to RD, but would need to
  choose only one of them for further platform
  development, as there would be only one slot open
  for a development project (unless one of the
  latter two projects is shelved)

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Decision Making Information

• Internal
• - Income Statement
• - Balance Sheet
• - Cash Flow Statement
• - Product Contribution
• - Portfolio Analysis

• Market Analysis
• - Economy
• - Positioning
• - Consumers
• - Gap Analysis/Focus Groups
• - Regions

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Decision Making Information

• Competitive Analysis
• - Products - Distribution
• - Market Share - Production
• - Technology - Financials
• - Marketing Communications

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Starting Positions

• Sales(B) Market Share() Net
  Income(B)
• Firm A 26.4 28.6 1.4
• Firm B 12.9 14.0 1.8
• Firm C 14.5 15.7 0.8
• Firm D 22.2 24.1 1.4
• Firm E 16.2 17.5 1.7
• _______________________________
• Moderate growth economy (2-4 GDP growth)

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StratSim Simulation Process

• Decision Making Process StratSim
• - Internal
• 1. Analyze current situation - Market
• - Competitive
• - Distill
• 2. Identify problems information into
• and opportunities meaningful insights
• - Who do we serve? - Why?
  - Competitive
  Advantage

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StratSim Simulation Process

• Decision Making Process StratSim
• - Marketing
• Implications
• 3. Generate Alternatives - Anticipate
• Competition
• - Financial

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StratSim Simulation Process

• Decision Making Process StratSim
• - Final decision
• 4. Decision - Pro-Forma Analysis
• - Turn in disks
• 5. Monitor results - Begin again

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Final Considerations

• Marketing and Business Strategy drives your
  decisions make sure you have one!
• Focus on how to best serve your target customers
  through a total offering product, marketing,
  service, and price
• Importance of team organization

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Final Considerations

• Manage your margins understand financial
  implications of decisions
• Understand fixed and variable costs
• Long term vs. short term
• Make wise investments
• Try new approaches apply concepts experiment
  have fun

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Schedule of Decisions
Decision 1 Monday, September 20th ,
2004 Decision 2 Monday, October 18th,
2004 Decision 3 Monday, November 1st,
2004 Decision 4 Monday, November 15th,
2004 Decision 5 Monday, December 12th,
2004 Decision 6 Monday, January 10th,
2005 Decision 7 Monday, January 24th,
2005 Decision 8 Monday, February 8th,
2005 Decision 9 Monday, February 21st,
2005 Decision 10 Monday, March 21st,
2005   Final Presentations April 1st - 2nd, 2005
(schedule to be announced)