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Title: Ultimate Business Tips for Beginners
Description: understanding so each student will exit the course having a strong foundation in business and in critical thinking which will support them in future course work and through life?
Description: understanding so each student will exit the course having a strong foundation in business and in critical thinking which will support them in future course work and through life?
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Introduction to Business
Third Edition
Dennis E
...
Davis
Kristi A
...
(www
...
org)
Printed in the United States of America
Acknowledgments
The authors recognize the enormous value added to this innovative project by
numerous project team members
...
The resulting vision was to create an introduction to
business curriculum that was first, and above all else, for the benefit of the student
...
But rather, how can we transmit information, knowledge and
understanding so each student will exit the course having a strong foundation in business
and in critical thinking which will support them in future course work and through life?
The end result is an electronic, globally interactive program of study, which
allows the student to learn, experience, and feel what its like to be an entrepreneur and a
manager within the global business community
...
We feel that the gain in understanding
and the creation of a solid foundation in business is well worth the small sacrifice of
rather minor information
...
The experience should include taking advantage of the active learning component,
the entrepreneurial strategic business simulation
...
Students move from concepts in the text to a view of
how real firms apply the concepts through application of that knowledge in the
simulation
...
Thank you to all the collaborating professors who made this program possible and
especially to the students that worked with the development team through two years of
testing
...
S
...
S
...
CSUChico U
...
A
...
7
OVERVIEW
...
8
STEP 1: Create a team
...
9
STEP 3: File for Incorporation (create a firm)
...
10
STEP 6: Determine if the firm will market in North American and/or Europe
...
11
STEP 8: Calculate how much capital (money) the firm must raise to be successful
...
12
The Global View Simulation
...
13
Product
...
14
Political Situation
...
15
The Markets
...
16
Information Sources
...
18
Time
...
And Seasonality
...
21
THE GLOBAL BUSINESS ENVIRONMENT
...
22
What is business?
...
23
Incorporation
...
25
The Simulation Environment
...
26
Political Environment:
...
27
Choosing A Firm Location
...
28
Local Political Environments
...
30
Economies At Work:
...
32
CHAPTER 3
...
33
Management
...
37
Human Resource Management in the Simulation:
...
41
The Starting Point for a Business
...
42
Strategy Development
...
43
Key Words:
...
45
MARKETING -- THE 4 P'S
...
46
Infrastructure
...
47
Product
...
49
Promotion
...
55
Wholesale/Distributor Promotion:
...
56
The Push Strategy
...
58
Business Communication and Advertising:
...
63
Price Based on Cost:
...
65
Price Based on Demand:
...
71
Margins on Retail Price:
...
73
Margins on Cost:
...
75
CHAPTER 5
...
76
Marketing Strategy
...
80
Cost Leadership:
...
81
Focus:
...
81
APPENDIX A:
...
82
Place
...
82
Determining How Much Product to Buy:
...
85
Peacock Industries:
...
85
Making Your Contract
...
86
Special Loans
...
87
Advertising Budget
...
88
Size of Sales Force in Training
...
88
Credit Policy For Buyers
...
90
Price
...
94
Desired
...
95
CHAPTER 6
...
97
Accounting
...
98
Assets:
...
99
Equity:
...
101
Important Accounting Concept
...
103
Income Statement
...
106
APPENDIX B:
...
107
Market Group Reports
...
108
Economic Index:
...
108
Bill Rate:
...
109
Financial Report
...
111
Dividends per Share (Div/Shr):
...
111
Sales and Marketing Report
...
112
Total Wholesale Orders:
...
113
Total Advertising:
...
113
Average Commission:
...
114
Prices:
...
114
Firm Reports
...
115
Credit Rating:
...
T
...
115
Debt-to-Equity Ratio:
...
117
Total Unit Sales:
...
117
Backorders:
...
117
Sales Lost:
...
119
Base Salary:
...
119
Product Prices:
...
119
Production Report
...
120
Inventory Unit Cost:
...
121
Sales Revenue:
...
121
Net Sales:
...
122
Advertising:
...
122
Bad Debts:
...
123
Administrative Expense:
...
123
Interest Expense:
...
125
Income Taxes:
...
126
The Income Statement and Balance Sheet Connection
...
127
Beginning versus New Special Loan:
...
130
Firm Reports for Firm 12
...
135
Firm Reports for Firm 14
...
141
Firm Reports for Firm 16
...
147
CHAPTER 7
...
150
Finance
...
151
Funding Sources:
...
152
To Borrow or Not to Borrow, That is the Question
...
155
Type of Debt
...
157
Cash-In-Hand
...
159
Risk
...
160
Payback:
...
161
Examples:
...
164
The Future Value Concept Applied in the Simulation for Assessment Purposes
...
165
Key Words:
...
168
THE SECOND TRIAL DECISION
...
170
APPENDIX D:
...
172
Market Research on Men's Aftershave
...
172
Seasonal Demand:
...
173
Backorder Rate:
...
174
Demand and Price Elasticity:
...
175
Example of seasonal demand pattern for Product 2 as a percentage of annual sales:
...
175
Inventory Carrying Costs
...
176
Returned Products
...
177
FORECASTING DEMAND
...
177
Seasonal Patterns
...
179
Forecasting Model
...
179
Market Group Demand Variables
...
180
Conservative Calculation
...
181
Determining Real Market Share
...
181
Aggressive Calculation
...
182
Conservative Calculation
...
182
Product Loyalty
...
185
MANAGEMENT INFORMATION SYSTEMS (MIS)
...
186
Typical MIS Needs:
...
187
Fully Integrated MIS Systems:
...
189
Employment in the MIS Field:
...
190
CHAPTER 9
...
191
The Process of Change
...
192
Winners and Losers in Change:
...
195
Key Words:
...
196
BANKRUPTCY
...
196
Salvage Options:
...
197
The Process of Starting Over:
...
198
QUICK GUIDE TO DECISION AND CONTRACT ENTRIES
...
198
To Review Your Firm Profile or Change Your Password
...
199
Practice Decision Forms
...
209
Confirmation Example
...
It is important
that you understand how the simulation is integrated with the information in the
text
...
The text is the starting point and guide for an
integrated learning experience
...
7
Chapter 1 -- Overview
OVERVIEW
There is little possibility that you would come to a true understanding of the new global
business environment or the mind set of an entrepreneur simply by reading about it
...
The experiences you gain in this program of study will lay a foundation for future
learning in business and in life
...
Given the importance of business in our
society, it is essential that each team member have a hands-on business experience
...
This
course will be taught differently than most of your other courses
...
You will have:
1
...
Standard text material
3
...
4
...
This program of study incorporates interactive and collaborative learning components in
which you must take an active role
...
This program requires that you become part of a team and start your own business
...
Although the simulation is FUN learning, it should be undertaken with seriousness
...
1
...
Develop a process for decision making
3
...
5
...
7
...
Decide whether you will sell Product 1 and/or Product 2
Determine if you will market in North America and/or Europe
Agree on how large a share of the market(s) your firm intends to control
Calculate how much capital (money) the firm must raise to be successful
...
Steps 1-3 are things you need to do now
...
STEP 1: Create a team
You may be assigned to a team as often happens in real business firms
...
That does not matter
...
Determine very
quickly what the team expects of you and how you can add value to the firm your team is
managing
...
Read the assigned text chapters in a timely manner
...
Arrange for at least one meeting time with team members per week outside of class time (for
some teams it will be a virtual meeting that can be conducted over the Global View chat
room system)
...
Be PROACTIVE
...
Instead, contribute,
communicate, volunteer opinions, be prepared for meetings and in that way, add value to
your firm, your team, and your education
...
Instead, it may be
better for a team to act like executive decision-makers, having all members gather and share
information, assigning responsibilities to individual members, holding members accountable,
prioritizing issues, encouraging debate from all members and reaching decisions in a timely
manner
...
Developing the process your team
will follow in making decisions is more important than the decisions themselves
...
Your team should spend time discussing and developing the decision making process as a
specific task
...
You are a team
...
In the end, the process should meet the needs of all members and
achieve the needs of the firm
...
It is now up to your team to decide on the name of your simulated
company and who will be in charge of communications for your firm (Communications Officer)
...
net
1
...
Firm Name
3
...
This will be the person your
simulation administrator will contact with any necessary notifications
...
Once your firm is fully incorporated with Global View and
all fees have been met, your firm will receive access to decision and contract menus as well as all
reports within the simulation
...
Within the Scent Industry there are
two products that can be offered for sale to simulated retail store buyers: Product 1 is men's
cologne, and Product 2 is ladies perfume
...
You will have the ability to test products in the simulated markets during your trial
(practice) decisions
...
This way you
can collect good research data on both products and how well they do in both markets
...
You can add
or drop a product at any time
...
Thus,
10
Chapter 1 -- Overview
adding or dropping a product line is an important strategic decision and should be considered
very carefully
...
We highly recommend you sell both
products in both areas in the trial decisions in order to gather information on which to make this
decision
...
Or, it may stay in
one area for the entire simulation
...
Within each trading area (NAFTA or the EU), your small start-up firm will be servicing
clients in a smaller regional area
...
Your competition for regional market
share will be from up to 8 firms in your regional space
...
Real World Example:
Safeway Incorporated has competition in its NAFTA and EU stores from other retail food
outlets
...
The measure of success in stock price is to have its stock provide average or above
average returns for its risk category to its stockholders
...
Top executives must be aware of both performance
measures
...
Your region is assigned to your firm
...
A region becomes unique because of the firms operating in that region and the strategies they
develop
...
STEP 7: Agree on how large a share of the market(s) your firm intends to control
In a market region with five competitors the average percentage of units sold by each
firm in each decision period is 20%
...
Perhaps a firm will take a position in the
regional market that will resemble a low price, high volume firm and seek 35% of the market
...
The dream of every business, simulated or real, is to have a high volume, high priced
product in the market with great market shares
...
11
Chapter 1 -- Overview
When it does happen, competitors eventually take your market share unless you can somehow
keep them out
...
Some firms
also develop strategies to get rid of competitors or to keep them from even starting to compete in
the market
...
Your firm will place orders with
manufacturers in the Advanced Global View simulation, contracting for your product to be
made
...
Once you have a contract to have your products produced, you
will need to market the products by making pricing, advertising and sales representative
decisions
...
Thus, you need money to pay cash for the products that will be made for you
...
The more areas you sell in (NAFTA and the
EU) and the more types of products you order produced (P1 and P2) and the larger your market
share aspirations, the greater your need for capital (money)
...
The basis for your financial decisions is in your firm's strategies regarding products,
market areas and desired market share
...
STEP 9: Manage your business over two simulated years (eight quarterly decisions are
required)
At this step, you will have completed steps 1 through 8 and practiced decision-making in
your two trial runs
...
To assure high
quality decisions are made at this critical point in time, your team's decision-making process
should be well established
...
Make sure all team
members realize the importance of having all team members participate in decision making, in
sharing the workload and in being prepared
...
The information will help your team understand team strategy and team dynamics
as the process of decision making in a team environment is created
...
Having experience and then rereading the teambuilding chapter will allow you to see the same subject matter from a new perspective
...
In real firms and in simulated firms, many management teams
become focused on day-to-day operations and decisions
...
We caution you
that such myopic and short-run styles of management are detrimental to your simulated firm and
to real life firms in general
...
Be aware of threats and opportunities in your global, national, regional operating
environments as simulated economic and political events unfold
...
Once you start up your firm you must keep it going
...
Poor
decision-making will have cumulative effects as will good decision-making
...
3
...
The results will show the impact of the previous quarter's decisions on the
existing momentum of the firm and in relation to the changing competition caused by
changes in competing firms
...
Do not think that one set of decisions can suddenly change everything
...
If your competitor is increasing quality as you
are decreasing price, you may find nothing changes
...
The Global View Simulation
The World Of Global View:
The Global View Simulation, like any sport or perhaps more like a good game of chess,
consists of various components, rules, and opportunities that each player must be aware of if he
or she is to achieve success on the playing field
...
There is an economy at work, a stock market, and a banking system
...
There are laborers, agencies, competitors
and business partners
...
You are business
entrepreneurs creating a company from scratch
...
Don’t limit your vision to a narrow and self-absorbed point of view
...
This means
that you have competitors working to defeat you, as well as business
partners hoping to establish beneficial relationships with your firm
...
The simulation, in this
respect, can provide you with a wonderful opportunity to experience international business first
hand
...
Along with the other participants in the simulation, you should be aware of the Global
View Administration
...
The Administration can assist firms with
questions about this text, chat-room software, or anything relating to the simulation such as
decision entry, passwords, financial statements, lawsuits approved by your professor, and
communications with other companies
...
Without product your firm would lie idle until its
initial monies drained away
...
For simplicity they are
called Product 1 and Product 2
...
What product 1 and product 2 are depends upon the industry your firm
has been assigned
...
Know your product
...
A unit is a
case of product, not a single item
...
The purpose
for keeping this factor hidden is to keep students from allowing their knowledge of retail store
pricing to influence their simulation pricing decisions
...
Environment
Environment in the Global View simulation can be broken down into five elements:
land, political situation, economic situation, markets, and administration
...
In this simulation you have a wide choice for
company location
...
Your
choice of corporate headquarters is of minor importance in the simulation
...
You do not pay
14
Chapter 1 -- Overview
rent or a mortgage on this storage space; you pay only an inventory carrying cost on units that
remain at the end of the quarter
...
The location of your manufacturer might be important
...
Also,
manufacturers have had delays in shipping due to hurricanes, earthquakes and other physical
elements
...
In the world of Global View, politics can affect your firm directly or
indirectly
...
Read the news, which is published
quarterly, to keep current
...
Even though your firm won't have
production facilities, the manufacturers you buy from do
...
Take preventive action when possible
...
These could be
anything from an opportunity to vote or communicate with a labor union leader, to an offer for
relocation or fire insurance
...
Don’t
feel boxed in by the decision set
...
Economic Situation
The third element of your Global View environment is the economic situation in which
you are operating
...
Everyone, regardless of location, is affected alike by the Global View economy
...
The EURO will be the currency used in the EU (Area 2) for pricing
...
S
...
The strength or weakness of the Euro Dollar or the U
...
dollar and the reason for
15
Chapter 1 -- Overview
its relative fluctuations will be explored in the news
...
Details of the EURO will be discussed in a later chapter
...
The Markets
The markets in which your firm will sell product make up the fourth element of your
firm’s environment
...
The consumer
market is supplied by retail stores
...
(Your firm
is a distributor - retail stores are your market)
...
The consumer market is made up of two regions, the NAFTA market and the
EU market
...
The wholesale market as in real life, refers to the trading taking place between
manufacturers and distributors
...
Thus, when someone discusses "wholesale prices or
wholesale volume" you will need to seek clarification about which part of the wholesale market
they are referring to
...
By entering into contracts with manufacturing firms, you
can buy products, which you will resell to the retail store market
...
Your firm will not have contact with
end consumers, only with the retail store buyers who in turn sell to the end consumer
...
There are two, in particular, which you should be concerned with
...
The Global World Bank sets monetary policy, which directly
affects the cost and availability of money
...
As firms get too far into debt, the bank grows uneasy
...
What can the bank do? The bank can call your loans and cancel lines of credit if it
becomes frightened by the way you are managing your firm’s finances (similar to closing or
16
Chapter 1 -- Overview
restricting your personal credit card account)
...
On the other hand, the bank can be a great friend and assist firms, which have
encountered a terrible financial problem, or have become bogged down with the weight of
interest from a special loan generated through a careless mistake
...
The other main administrative entity in the Global View
World is Peacock Industries
...
Peacock's primary function is to act like a manufacturer and sell
finished goods to companies in the simulation
...
Peacock is a government funded
firm and thus politically sensitive
...
Prices are
high and fixed (that is, prices cannot be negotiated as they are with private manufacturing firms
...
This will allow you to
experience entering contracts
...
Do not hesitate to talk with manufactures far in advance of actually ordering product
for the coming quarter
...
The
current price for Peacock products can always be found in the quarterly news
...
Do not
become dependent on Peacock simply it is an easy way to get product
...
To buy finished goods through Peacock Industries, you simply enter a contract using
Peacock's firm number as the supplier for product
...
Information Sources
17
Chapter 1 -- Overview
Where do I look for the information I need?
The Simulation:
•
•
•
•
•
•
To enter decisions
To enter contracts
To view the list of current contracts involving your firm
To review and print market group reports
To review and print firm reports
To view stock performance
The Message Board/Chat Room System:
To post messages to stockholders
To post requests for product
To negotiate contracts
To view messages from other firms
To view messages from GV Admin
To participate in online tutorials
To chat with senior mentors
Global View Web page:
•
•
•
•
•
•
•
To access the simulation -- decision/contract entry and firm reports
To access The Message Board/Chat Room System
To view the Frequently Asked Questions list
To view the Introduction to Business program page updated weekly by your simulation
administrator
To view the chapter links
To view the simulation news
To view unique reports when available
The Global View Matrix
The Global View Simulation is a matrix (or related set) of participating firms
...
There are a series of market groups each with its own region
...
There are many regions perhaps as many as 30 or 40 depending on the number of firms
18
Chapter 1 -- Overview
participating
...
Thus, your firm can never have more than seven direct competitors
...
The number of the market group plus the number of the
firm in that market group is the firm number assigned to your firm
...
Use this number to identify yourself
to other firms in the simulation and to the Global View administrators
...
Within your market group your firm can sell into your regional market in NAFTA and/or
into your regional market in the EU
...
Each market group has its own market region that
firms from other market groups can't sell to
...
The industry selected will be the same for all firms in the simulation
...
There are, of course, 4
quarters per year
...
Quarter 2,
would pick up with April, May, and June
...
All teams must submit a set of decisions each quarter
...
) will be stated at the beginning of each simulation
...
Each quarter
builds on the previous quarter, creating an accumulated history for your firm
...
And Seasonality
There is another important consideration when looking at time in the Global View
Simulation, the concept of seasonal demand
...
Each of these products has a quarterly seasonal pattern in which
demand and thus, potential sales changes
...
Likewise, product 2 may have terrible sales in quarter 3, but excellent sales in
quarter 4
...
Your firm must be aware of seasonal demand from the consumer market prior to
placing an order to purchase product from a manufacturer
...
All online communications including chat-rooms,
you must follow certain codes of conduct
...
The tone and content of your messages should be
professional
...
This will allow
the receiver to identify the firm
...
Global View Administration, will not forward messages for your firm
...
This will quicken the response time and establish better lines of
communication between your firm and the firm(s) you are working with
...
Ultimately, it is your perceptions that will create the definition
...
21
Chapter 2 – The Global Business Environment
THE GLOBAL BUSINESS ENVIRONMENT
What is business?
Authors of competing introduction to business texts will not agree with our definition
of business
...
How would you
define business? Before you accept the standard definition, pose these questions to
yourself and others:
1
...
Is this always true? Is there a difference between something needed and
something wanted? Do people need and want things based on their own value
system or do businesses create needs and wants through advertising? Are cigarettes a
need, a want, or a business created desire?
2
...
Is something not a business because it sells illegal goods?
3
...
The Democratic and Republican parties in the
United States sell candidates to the American public
...
Do you agree that the
selling of a candidate and a political party's ideals are a type of product or service?
4
...
When a local
restaurant opens and makes a profit, it pays taxes and retains part or all of the aftertax profits in the business
...
The firm will often reward those who made the business successful with
higher salaries or bonuses in addition to retaining some of the profits to expand the
firm
...
Similar to the successful
restaurant, the hospital will also reward the people that made it a success with higher
salaries or bonuses, and/or use its surplus retained money to expand its services
...
Profit seeking
firms have owners
...
Ownership is of key importance in many aspects of a for-profit business
...
Both profit and non-profit
businesses must seek start-up capital (money to buy inventory, machinery, ambulances,
fixtures, etc
...
Both must seek continual revenues to stay in
business
...
Non-profit businesses must do the same and/or appeal to donors in order to stay in
business
...
Consequently, nonprofit businesses must carefully monitor two very different markets (the benefactors of
the service or product and the donors)
...
In defining "What is a Business" should a distinction be made
between for-profit and not-for-profit businesses?
Risk and Return:
The knowledge you will gain about business in this course can be applied to
almost all organizations and institutions in the world
...
A business is an enterprise where the owners, boards or managers take
risks in order to make a profit, gain excess earnings, secure power, influence the lives of
others, gain prestige, or insure self-preservation
...
If you take a risk expecting on average to lose it's called gambling
...
In order to join in a discussion on the definition of business, reflect on what a
business is
...
Or is business better defined as taking risk in
anticipation of a gain? Your instructor may require a written definition of "what is a
business?" to be posted on the The Message Board/Chat Room System bulletin board
...
In the United States,
incorporation is a state process, not a national or federal process
...
Other states seem more
interested in protecting investors and keeping a close watch over firms rather than
making it easy for businesses to incorporate
...
Why do businesses incorporate? Once incorporated the firm assumes the legal
status of an individual
...
If, for
example, a firm makes a serious mistake or an accident occurs a lawsuit may result
...
In some
cases, where there was intent to do harm or prudent decision making was not used,
certain officials in the corporation might be included in the lawsuit
...
When the investors want to get out of
the business the legal protection through incorporation makes it easier for the original
investor to find a new investor that will write a check for the stock
...
Investors also like the idea that if one investor has personal, health, legal, or
financial problems, it does not directly affect the firm
...
The new
investor assumes the same rights of the investor that sold the stock
...
Other forms of business ownership are often used
...
Sole proprietorships are very easy to start and
are often done for small sized businesses
...
If the business needs more than one owner in order to get the needed funds or
human resource assets (programmer, mechanic, ER medical doctor, etc
...
Partners can join by adding capital and/or
talent
...
Legal advice should be sought to make sure the partnership agreement would
cover many situations that are often overlooked as a partnership is formed
...
Thus, if investors become irritated with the
firm's performance or they need money quickly they can sell their stock to another
individual
...
Thus, ownership continues to
change but the corporation maintains the funds from the original sale of stock and the
management team stays intact
...
GM has your money and
you have the car
...
Instead, the sale
will be made to a car dealer or a private party
...
It is rare, but sometimes that is the only
method to find a stock buyer if the company is a little, regional firm
...
If, by
luck, a buyer is found, determining the value of a share in a business is not easy, even
when both buyer and seller bargain in good faith for a fair value
...
How much is a piece of paper worth that has rights to
partial ownership in a business?
A system has been developed to facilitate the buying and selling of "used" stocks
...
Before one of these large stock exchanges will handle the resale of stock in
a firm, that firm must have achieved some positive investment reputation
...
The process of examining a firm to see if it meets the requirements for active
trading in the large stock exchanges is called listing
...
Having a stock "listed" or traded allows the investors to quickly and easily find a
buyer for their stock
...
Cash is the ultimate in liquidity
...
A non-listed stock like a used car
is less liquid
...
Depending on the
market, homes might turnover (sell) in three months but in some years it might take 12
months or more
...
Liquidity
provides options
...
Citizens need to influence their governments to
create a “user friendly” environment so ideas of creative individuals can evolve into new
products and services
...
What type of economic environment will keep an
economy moving into the future?
Individuals throughout the world start businesses
...
They may be accepting delivery of
their first box of lettuce for a new restaurant or perhaps posting the last graphic to their
new online store
...
Within this course you will have the opportunity to begin a business in a simulated
business environment
...
Towns, cities, counties, states and nations all differ in the degree to
which they will assist entrepreneurs (those who start businesses)
...
In the United States, small businesses are extremely important
...
New job employment, are most
often created by small businesses
...
They keep the
economic environment vigorous
...
It would appear that as firms become successful and rich in terms of
assets (cash, equipment, etc
...
Their tolerance
for assuming risk in the pursuit of gain diminishes as wealth is accumulated
...
But why
wouldn't a large firm attempt a little project, which would have minimal impact in the
case of failure? Consider whom they would put in charge of a small project? Not many
executives have the breadth of knowledge or skills needed to handle all the aspects of
running a firm
...
They turn to a specialized support staff
...
In the arena of starting small businesses, entrepreneurs are unique individuals that
have an edge over executives and managers from larger corporations
...
Because of the value added to society by small business, governments at different
levels have established small business programs
...
The simulation has a business environment with competing firms, a political, and an
economic environment
...
You will have the product made for your firm by a
manufacturer
...
Your firm will be contracting for your private labeled products with
manufacturing firms located in specific political and economic environments
...
(They supply finished goods to your firm, but do not compete in your markets
...
In the simulation you will
need to create names that will be used for the product(s) your firm will be selling
...
The manufacturer will deliver finished
26
Chapter 2 – The Global Business Environment
goods to your firm
...
Association Global View staff will provide you with information about available
manufacturers and how to contract with them
...
Political Environment:
Since manufacturing firms and your firm share the same political and economic
environments, you can assess how risky it is to sign a private label contract with a firm
located in a politically volatile area versus a firm located in Kansas City, USA or Paris,
France
...
Mexico City, for example, could experience an earthquake that might
limit production for the firm's manufacturing product
...
A
firm located in the North Eastern U
...
could experience a power shortage that would limit
production
...
The wise executive team will take into account, all
factors, both political and economic, when deciding which manufacturing firm to do
business with
...
At times the political environment is spurred by the
current economic conditions
...
Be sure to read the quarterly news released with the
results of each decision set to view the ever-changing economic environment and the
forecasts for what the future holds
...
The sub-environments are major
trading areas formed by countries agreeing to “free” trade or at least to reduced
restrictions on movement of goods, services, capital and labor
...
The two markets used in the simulation exist in real life
...
You may find in reading
books and articles a few years old that the EU was then referred to as the EC (European
Community) or EEC (European Economic Community)
...
In the longer run industrial production seems to be moving to
areas of lower cost production within the defined trading area
...
Large-scale banks are taking over or destroying smaller local banks
...
Forming multinational giant trading blocks where products, labor and capital can
move with few restraints has little immediate effect
...
Stimulate the economies involved;
2
...
In a very subtle but powerful manner, alter the cultures and cultural values that
previously existed in each of the separate states now a member of the trading area
...
Your firm can sell in both
areas regardless of the one city selected as the firm's headquarter site
...
The simulation has nicknamed them Area 1
(NAFTA) and Area 2 (EU), abbreviated as A1 (Area 1) and A2 (Area 2)
...
They might say, for example, six bars in the downtown area is enough and they
don't want yours
...
The attempt to exclude strip clubs, limit the number of bars and ban chemical
operations through zoning laws seems to run counter to a free enterprise system
...
Thus, a new firm must carefully consider the local political
environment before committing to a project
...
We do not believe it exists
...
What we have today is a sliding scale between nonexistent pure capitalism and non-existent pure communism
...
In the more capitalistic systems, business firms react by supplying products and
services to meet the needs of other firms, the government and consumers
...
Firms in
such a system attempt to eliminate competing firms through superior products or lower
prices
...
Those individuals that succeed
become rich and powerful, commanding a large amount of the resources in that society
...
The
discrepancy between those with wealth and those without wealth can become extreme in
this pure capitalistic environment
...
The cost to
embrace capitalism in monetary terms, resource terms, and human terms is indeed
staggering
...
This system attempts to achieve
30
Chapter 2 – The Global Business Environment
extraordinary efficiency through central planning with all wealth-creating resources
owned by the government
...
The government determines what,
when, where, and who will produce the goods and services to be delivered to society
...
In
socialism, the government owns, and through central planning, controls key industries
within the economy
...
Also
included might be communication and transportation
...
Economies At Work:
Karl Marx was the intellectual theorist who, through his writings, made
communism appear to be a sound economic system
...
Today, communism in its purer forms is recognized as
a failure
...
Let us call it
the "CC Scale" (capitalism to communism)
...
Communism failed because it destroyed individual initiative
...
The
idea that each would produce according to her or his ability, however, began to wear thin
since rewards were the same despite the imbalance of work efforts
...
Central planning also had a hand in the failure
...
In capitalism, when
mistakes are made, a business unit fails
...
In central planning, when a mistake is made the entire system may
experience severe problems
...
"
The inherent flaw in pure capitalism is not much different than in communism
...
That small yet
very powerful group of business owners will attempt to exclude newcomers from
competing in their industries
...
Thus, pure capitalism without control eventually results in severe
limits on the economic freedoms of most individuals in that society
...
In both extremes of pure communism and pure capitalism, it would seem that the
society and individuals in that society eventually fare poorly
...
The best mix of economic systems
depends on what the society needs at the time
...
If a society needs more wealth created, lowering taxes and restrictions
while increasing business incentives could encourage private enterprise
...
This wealth is then redistributed through
welfare programs to the poor
...
Extremely high taxes on profits will also
remove the wealth used by capitalists to create more wealth
...
It
was suggested by the administration that poor and middle class people would be better
off allowing the rich to have their tax breaks since almost 100% of the tax savings would
be directly reinvested into new businesses or expansion of existing business
...
Do you think "the trickle down effect" is a valid economic policy?
Citizens in every nation need to understand where their nation is positioned on the
scale between communism and capitalism (the CC scale)
...
It is rare that a
society ever rests long at any one point on the CC scale
...
What about the mail and package systems? Is your mail
system run by the government or private enterprise or perhaps by both competing
systems? Should Federal Express and United Parcel Service in the U
...
be allowed to
compete with the mail systems of governments all over the world? Would private
industry agree to deliver a letter to anyone with an address anywhere in the world? What
if it were unprofitable to do so? Would Federal Express do it for the same price the
government charges? Cheaper? Faster? Is it dangerous to allow them to try?
With political and economic environments continually on the move throughout
the world, every owner, manager and executive, from the smallest to the largest business
must be constantly monitoring their external political and economic environments
...
The analysis has many facets and
depends on your previous exposure to host of data sources
...
The interactive environment can be supportive, such as in
classrooms, or hostile such as in used car lots
...
In
some cases mutual goals become singular goals when members "sign on" or
"buy in" or "become a partner"
...
Such is the power of good management
...
In some
cases, the term management has been extended to the control of non-human resources
...
" "I manage the pipeline
...
People
need to communicate with people in order to accomplish tasks
...
This is true even if one manages the
human resource department, a computer system, or a pipeline
...
The perspective from which you consider management will produce
different interpretations of who and what managers do
...
One method of categorizing levels of command in business is as follows:
Top Management
Middle Management
And no, it is not called Bottom Management
...
Top Management is focused on design and implementation of the firm's overall
strategy
...
Top management assumes responsibility for analyzing current
information and planning for the future
...
The vision is a clear statement of where the firm is going and what it
will be like when it arrives
...
The vision is a strategic
statement and is often kept very confidential
...
The mission statement is a public statement about issues that
the firm feels are very important as it goes about its vision quest
...
Examples of content would be,
"…provide quality products to …", "… respect all employees …", "… be a member of
the community …", "… our stockholders will earn … "
...
Middle Managers are directly involved in the implementation of strategic
initiatives developed by top management
...
Examples of first line managers are department chair
(in an academic institution), office manager, floor supervisor and foreman
...
In the after-the-fact analysis, observers criticize
the decision maker suggesting they could do better themselves
...
But decision
making by managers must incorporate all the skill and knowledge items listed above
...
To the outsider, the
decision might look rather mediocre at best
...
A third perspective of management is to view specific functions that managers
perform
...
A fourth perspective of management is to view jobs as they are often classified in
large-scale organizations:
Human Resource Manager
Financial Manager
Production and Operations Manager
Marketing Manager
MIS Manager (Management Information Systems)
Accounting Manager
Administrative Manager
You will find these job classifications listed as majors in most schools of
business
...
The administrative manager title is somewhat vague
...
It is not unusual to find specialized tracks in the management
option of universities such as pre-law or international business
...
An administrative manager
may be responsible for a division (the natural juice division), a plant (the semiconductor
36
Chapter 3 -- Management
plant in San Jose) or be geographically responsible for all activities such as the firm's
activities (manager of China operations)
...
There is an established line of command
much like that found in the military
...
Democracy as a system of government is fairly new in the history of human kind
...
The masses, have in fact, become proactive
...
Until recently
(1,000 to 100 years or so ago), the boss was not just called the slave master or dictator, he
probably was the slave master, chief, or dictator
...
The term Chief Executive
Officer (CEO) however, is still used in a positive sense
...
In its
place came economic incentive
...
Employees sometimes wanted more money and refused to work until they go
it
...
It meant that the owner or manager was not
responsible for taking care of the employee
...
The firm simply had to hand out money
...
This freedom from caring for the worker and his family, provided owners and managers
time to concentrate on the revenue producing portions of the business enterprise
...
Money as the main source of compensation provided freedom to select what to
purchase and an opportunity for mobility
...
History to many reading this text is something that happened more than twenty
years ago
...
The changes we are discussing are not isolated
events but part of the entire fabric of social evolution
...
Democracy, the industrial revolution, NAFTA,
computers, and digital communications are not isolated topics but part of an exciting
process we are all part of
...
37
Chapter 3 -- Management
The monetary compensation system of motivation combined with the industrial
revolution was a major factor in building the employer-employee system we have today
...
There still is the line of command
...
A recent change in the way U
...
and E
...
business gets the job done came from the Pacific Basin
...
Firms in the United States and Europe died as the external threat from the Pacific Basin
overpowered them
...
Corporate
executives, government, and academic researchers examined the Japanese style of
business in order to understand and to meet the threat
...
This was the team approach
...
Top
management would still make the major decisions, but employees were viewed as valued
inputs to the decision making process
...
They also found that as employees talked with each other in teams across departments or
functional areas, the team could solve many problems on site
...
The new system
empowers the employee or employee team to make decisions at the point the problem
occurs and in relation to that person's position in the firm
...
This Pacific Basin style of teamwork and involving employees, brought dramatic
change to the way businesses organize
...
With employees being empowered on the production line or
at the point of customer contact and with the new computer technologies, much of the
former staff that worked between the front line employee and the top decision-makers,
were no longer needed
...
Businesses compressed their organizational structure
...
The major decisions could be handled more efficiently at the top, and
empowered employees solved the minor problems in a team fashion at the bottom
...
The only safe guess we have about the future is that things will change
...
The system is not against you
...
It is simply a system
on the move
...
In fact, it was a greeting delivered to someone you hated
...
It forces us to become involved and
improve, or, accept a lesser life
...
Governments not only tolerates change, they now promote it
...
In
this environment, entrepreneurs blossom, research and development laboratories of largescale businesses are well funded, and individuals remain surprised at the startling new
array of products and services
...
Change also eliminates jobs and redefines what makes a valued
employee
...
Change and our ability as individuals and business firms to
embrace it determine our future and our place in the global economy
...
We live in a most interesting time!
Human Resource Management in the Simulation:
By this time in the course, you, as a team member, have had the opportunity to
interact with other team members
...
Very skilled individual with few social skills; too shy to be productive
...
Very skilled individual who knows it and wants to run everything - the person's idea
of a team is that a group of less competent people will do the clerical work and the group
will offer up much praise to their intellectual superior
...
The individual is learning and trying very hard, but has too many problems in their
personal life - if they ever learn that the team has needs and also demands a commitment,
then there is hope
...
The individual is learning and trying very hard but is slower than the rest of the team;
what to do?
5
...
6
...
7
...
8
...
9
...
39
Chapter 3 -- Management
9
...
How do firms determine what type of person they need in the firm? Once they
determine the need, how do they go about finding the special person to fill that need? As
the needs of the firm and the needs of the person change over time, what can be done to
keep them both growing? How do firms motivate employees? How do they control
employees and keep them focused?
These questions are valid for any business
...
Given the broad range of skills and motivation that might exist in your team, there are not
always easy or definitive solutions available
...
Your instructor might
request a written personnel document
...
Personnel management has
become both more complex and more important with the growing concerns over
discrimination by sex, race, disabilities, and age
...
To do so, the firm
must establish some basic criteria
...
Specify what the team expects of each team member
...
2
...
This is a
process
...
You have four members on your
team
...
If your emotions cloud your view of the criteria, you
have not acted in a professional manner and perhaps, not in a legal manner
...
That is
no longer acceptable in most businesses in many countries
...
In today's fast changing business world, internal and external monitoring
should constantly be taking place
...
The task of running even a small family operated pizza restaurant can be
overwhelming
...
No matter what the size of the
firm, someone in the family pizza restaurant, a group in Ford Motor Company, or a group
in Sony Corporation, the firm must make sure the business moves forward through the
complicated business environment toward the firm's evolving vision
...
It
is a rational consideration of the forces at work both inside and outside the firm
...
This early warning
system and resulting decision making is defined as being proactive
...
The Starting Point for a Business
People organize to achieve some goal or objective
...
It might be a very long run complex
plan such as establishing plants, equipment and a marketing force to dominate the world
auto market
...
Where you
want to go is referred to as your intent or vision
...
Sometimes, the vision is
based on a new piece of equipment, idea, or invention they came up with by being
41
Chapter 3 -- Management
involved with another task
...
The Starting Point for Your Team:
Your business team will be asked to establish a vision statement
...
The statement
can be based on several standards
...
Each requires the team to
consider how the firm is financed, how assets are used, how to react to competitors and
how hard the team will work
...
As in most business
ventures, taking on more risk exposes the team to a greater chance of failure
...
Another, more simple measure provided by the simulation is the rate of annual profit
when measured against the stockholder’s total investment
...
A firm can
measure itself easily against the return on equity of all the other firms in the simulation
...
Another common performance
standard is sales
...
This vision of being the largest sales
organization in the simulation will require dependable finished goods suppliers, a large
capital structure, close monitoring of the competition (in your industry and in other
industries), and an aggressive well-defined marketing program
...
The team could measure the firm's total annual profits against competitors
...
Therefore, measure profits as a
percentage of assets
...
A return of 20% annually on assets is better than a 15% return
regardless of the firm's size
...
"
Some firms start into business with a less specific intent
...
In addition, our firm will have a
respectable share price, the trust of all our stakeholders, and never fail in maintaining
high ethical standards
...
Stating the firm's intent or vision helps top management plan and make decisions
...
First, the measurement standard could be set so rigidly or be so tightly defined that it is
not able to stand sudden shifts in the external environment
...
" A situation might develop in politics that will shake
investor confidence and the stock market could crash
...
It might be best to keep your firm's vision measured on a relative
scale
...
With this
statement, even if the stock market crashes, you might be well within the upper half of
stock value of all the firms
...
The second problem is being non-descriptive
...
A
statement such as, "The team wants to feel good about their experience
...
Generally in the simulation, as with business firms, an initial statement of intent is
agreed upon by the team members
...
The team better understands its
competitive environment and the greater economic and political environments it is
operating in
...
The review of the vision statement at the end of the first year combined with a
strategic analysis of internal resources and external threats and opportunities often result
in a modification of the vision statement
...
Strategy Development
Decision Making:
In order to make good business decisions managers must have both qualitative
and quantitative information and have a process for evaluating information for decision
making
...
Most of the academy's
members are university instructors from the quantitative disciplines in business such as
finance, statistics, mathematics, and management information systems
...
Strategic management is taught more as a process of decision-making and
considers numerous non-quantitative variables as well as quantitative data
...
In order to consistently make good decisions, the executive team must have:
a
...
Quality information in the appropriate format
c
...
The team must share the same set of objectives or goals
...
Say, for example,
that market research concludes (with little chance of error) that consumers adore the
firm's new test product and would buy it at the suggested retail price
...
It could be a good
decision that turns bad very fast if production workers are about to go on strike (an
internal environment problem)
...
In this simulation, that group of
top-level executives refers to you and your team partners
...
Marketing sets the image of a product and the company
...
45
Chapter 4 – Marketing – The 4 Ps
MARKETING – THE 4P’S
Infrastructure
Most of your marketing experiences have been as a buyer
...
What is your first
recollection of a purchase? Probably grabbing something at the grocery store while your
mother attempted to keep you under control
...
The customer requires that the product or service be in some geographic place
and available within some narrowly defined time period
...
These requirements to meet a buyer's needs
are often referred to as the "4 P's" of marketing:
Product
Place
Price
Promotion
...
Infrastructure is the physical support structure that moves
things from place to place in a society
...
Because of the enormous scale (size) of building infrastructure within a nation, the
government generally undertakes the project or provides legal and financial support to
private enterprises to encourage firms to take on the needed projects
...
Sometimes governments actually operate enterprises tied closely to infrastructure
projects
...
If a country's population is widely scattered and roads are poor, catalog sales may
be the method by which the population fills most of their needs for non-perishable goods
...
As households in a society become more concentrated,
government revenues increase for that area allowing roads to be built
...
It is known
that efficiencies in manufacturing and distribution are gained as infrastructure
improvements are made
...
The Internet is a new infrastructure system that is changing all aspects of
marketing
...
Its purpose was for defense not
46
Chapter 4 – Marketing – The 4 Ps
commercial use
...
Virtual retail stores that sell products and services directly to consumers on the
Internet are now common
...
Other market-oriented firms are considering the Internet as a means to promote
their products
...
Society, through its government, also creates rules and regulations
that dictate how private firms can use and develop the infrastructure
...
It is important that the members of a society understand the importance of
creating infrastructure and the government's direct and indirect role in this process
...
Entrepreneurs in poor nations are often frustrated with the existing infrastructure
...
All members of society will eventually benefit as the entire nation
becomes wealthier
...
A way out of this predicament is to entice private capital from large foreign firms
...
If foreign manufacturers can be encouraged to build facilities in poor
countries that lack infrastructure, their money, along with the employment of local
workers, will help lift a nation out of poverty
...
When infrastructure changes are initiated, everyone
benefits in the long run but some groups may suffer in the shorter run
...
While everyone in the area is pleased
to have a wireless phone, the few households that have the tower near their home are not
at all pleased
...
The 4 Ps and Web Marketing
47
Chapter 4 – Marketing – The 4 Ps
Products and services are supplied by businesses for the benefit of businesses
(business-to-business or B-to-B) or by businesses for the benefit of consumers (B-to-C)
...
"B-to-B" and "B-to-C" spaces are new terms to help
express the rapidly changing distribution systems used by businesses
...
The Internet has allowed some typical B-to-B firms to market via the Web directly to the
consumer bypassing well-established B-to-C firms
...
Virtual Web stores bypass the very expensive
process of building a real retail store (referred to as a "brick and mortar store")
...
We will
follow the standard definitions but will also pose questions to better understand how
marketing must adapt to the rapidly changing international and technology driven
environments
...
The common perception is to think of
products in a physical sense such as a car, a Coke, a massage, or having your palm read
by a fortuneteller
...
When you purchase your Coke are you:
A
...
Seeking a brand name you can rely on for consistent flavor?
C
...
Avoiding decisions about which brand is the best flavor?
E
...
Thinking about the last Coke commercial you saw?
G
...
Feeling as though you are part of a world order of youth that endorses Coke?
I
...
Just wanting a Coke like the first Coke you had at the age of three and you don't even
want to think about why you want it?
The list does not exhaust all the possibilities for the purchase of a Coke, a Pepsi,
or any other soft drink for that matter
...
When you purchase the services of a fortuneteller are you:
A
...
Buying a present for someone who would never purchase such a service on their
own?
C
...
What are three possible motives for purchasing such a machine?
48
Chapter 4 – Marketing – The 4 Ps
A
...
C
...
This list does not include the other 3 Ps being place,
promotion and price
...
The more buying motives you can satisfy with a product,
the more total buyers you will have
...
Many people ask the
consumer why they purchased the product or if they were satisfied with the service
provided
...
Cards placed on the table at some
restaurants inquire about your level of satisfaction regarding both food and service
...
As a consumer you will often find cards attached to product
warranties that ask for personal information
...
The firm can then determine how to
improve or alter the product to gain new customers without loosing existing customers or
how to sell you additional products and services
...
Many products and
services in today's marketplace will be transported many times, adding value at each stop,
before the end consumer makes the purchase
...
Buyers are other firms in the distribution channel adding
value directly to the product or adding place value by locating the product where the final
consumer can purchase it
...
Distribution channels are identified by type
of product
...
Examples of an end user are:
49
Chapter 4 – Marketing – The 4 Ps
1
...
A student purchasing a computer directly from a manufacturer's website is a modern
Internet distribution channel, which concludes at the home where United Parcel or
DHL delivers the product
Industrial customers use the product or service for their own business needs
...
Some products are designed and placed to satisfy businesses as the end user
...
A dump truck with snowplow attachment sold by Ford Motor Company to the local
highway department
2
...
An accounting service for a local motel
Industrial buyers usually look for a good quality product, prompt delivery and a
competitive price
...
A firm selling cleaning supplies may promote its products by emphasizing the fact
that it can deliver a wide assortment of goods within 24 hours
...
Just-in-time delivery of products and services allows
firms to operate with less storage capacity and less money tied up in raw material
inventories
...
Examine the marketing channel which exists between wheat growers to bread
manufacturers presented in Exhibit 1
...
The exhibit only follows the wheat to bread channel with
reference only to other supporting channels
...
At some points in the channel, sales organizations arrange the sale between a
seller and buyer without taking title to the goods
...
They assist the buyer in arranging
for the sale of a product
...
Some systems transfer title or ownership at each step
...
In general terms, brokers work on large, one-time deals like a home sale
...
Agents represent the buyer or the
seller and on rare occasion represent both sides
...
A sales representative (sometimes called a manufacturer's representative)
promotes the firm's product along with similar products from other firms
...
While the rep’s total volume of orders might
be fairly large, the order for any one product from any one store may be fairly small
...
The next time you have a piece of wheat toast
consider what it took, in terms of established marketing channels, to bring that bread to
your table
...
)
Baking (mixers, ovens and other)
Packaging; to end consumer if bakery is
in a retail store; otherwise channel
continues by truck delivery with sales
reps selling bread to retail stores
Repair service for farm equipment
(support)
Accounting and Banking (support)
Flour mill Broker or Agent
Various marketing channels for each
type of ingredient (eggs, yeast, etc
...
Sales reps to sell packaging supplies to
bread manufacturers
As a staff member in a marketing team you would be concerned about the section
of a particular channel in which your firm is positioned
...
Even though your livelihood
is dependent on that section of the distribution channel, you and other executives must be
aware of what is happening throughout the entire channel
...
Should the wheat crop be damaged or truckers go on strike, you
need to be prepared
...
Sometimes the distribution channel is very direct
...
51
Chapter 4 – Marketing – The 4 Ps
Exhibit 2
Producers:
Public Accountant
Farmer’s Market
Restaurant
Dentist
Consumers
Next, in Exhibit 3, a commonly used marketing channel is presented
...
First, smaller manufactures that sell across a broad
geographic region cannot bear the cost of a large sales force
...
In this fashion, the cost of driving to a store to see the
buyer and attempting to make a sale is spread out over the product lines of several
manufactures
...
The packaging and
accounting with each small order increases the cost of doing business
...
Consider a drug store and its products
...
The task would be excessively time
consuming and would dramatically increase costs
...
Instead of sending
little orders to each manufacturer, the sales reps will send all the small orders as a batch
to a wholesaler, not to each manufacturer
...
The wholesaler actually
takes title to the merchandise
...
The buyer can place an order with the wholesaler
for six different types of beer from six different manufactures and have all of them
delivered from the wholesaler's warehouse in days or even hours
...
There is often great rivalry between wholesalers for accounts
...
To be competitively priced, the wholesaler can only take a small
profit on each item sold
...
Competition in the wholesale business is keen and does not allow a firm to
make many mistakes
...
Producers of goods
and services often use more than one channel
...
One day the snack food company will have its truck deliver
to a national grocery chain store warehouse
...
Over the next two days
the wholesaler’s trucks will deliver directly to local grocery stores and convenience stores
based on orders taken by sales reps
...
The
commission paid to travel agents for providing the ticketing service is a small percentage
of the total cost of a ticket, about 6%
...
In the airline industry, 6% of sales amounts to millions and millions
of dollars each year
...
Many buyers do not use the airline's ticketing service
...
The air ticket buyer
often has difficulty gathering information about flight schedules, class of service, cost
and limitations on use of the ticket
...
A travel agent,
53
Chapter 4 – Marketing – The 4 Ps
therefore, does a service for both the airline and the buyer, a service that cannot be
duplicated by any one airline
...
If this service
works as expected, the software will be able to satisfy the needs of many ticket buyers
...
Exhibit 4
Retail portion of the Air Ticket Channel
Airline
(On-site, by Phone, or Internet)
(Computer or Phone)
Consumer
Travel Agent
(On-site or by Phone)
Consumer
Utilizing the Internet airlines might be able to provide a service that matches or
beats the service provided by most travel agents
...
The
airlines will have 6% additional revenue from the Internet sales
...
The
Internet will allow airlines to promote their ticket information in a clear format without
pressuring the potential buyer
...
Once the potential buyer is on-line, airlines can also promote travel and vacation
packages
...
If successful with the new technology, airlines could take over
the entire travel agents' revenue source
...
If the airlines can generate
enough volume in sales for rental car firms and hotels, they can arrange for special low
cost rates that travel agents cannot beat
...
When a firm utilizes the benefits of a longer marketing channel it has less work,
can concentrate on what it does best and overall become more efficient
...
Not being aware of the end users' changing needs will allow competitors to
better fill the needs and take the firm's customers
...
Travel
agents will need to respond to the threat of a collapsing market channel
...
If the new
Internet technology works, how would a small travel agency compete with a giant on the
54
Chapter 4 – Marketing – The 4 Ps
Internet like American Airlines? For one small firm it might be impossible
...
A large enough group, all
agreeing to work together, might be able to create some competitive Internet software
...
Which site? The not-yet-created Travel
Association Internet Site
...
Given the sudden technological revolution it appears that all firms in all industries
need to deal with dynamic external changes
...
Sometimes competitors need to work together in an association in order to meet
serious external threats
...
Marketing channels, technology and customer needs are always evolving
...
3
...
4
...
5
...
Promotion
Retail Promotion:
Your business must alert potential buyers that:
Your product or service exists
That you are ready to do business
Provide directions to the location of the product (physical or Web)
...
Very few businesses secure a clientele and never have to be concerned about
promotion thereafter
...
But even these lucky businesses usually put out a lunch
billboard or a list of specials at the point of purchase
...
The brewer's
products are sold throughout the United States
...
Sierra Nevada has promoted its beers at competitions and beer festivals
...
Such a high level of
success with such minimal promotion is highly unusual
...
The firm started business just as
microbrews became very popular
...
The microbrew market is
a very small segment (niche market) existing in a very large beer market
...
Thus the firm was able to secure loyal customers early in
the development of the market, which competitors cannot easily take over through
advertising
...
How can you market this image to firms? B-to-B firms must
market their products and services both down the channel to the producer (manufacturer)
and up the channel to other firms
...
Entering
into discussion to form a business relationship with a manufacturer, wholesaler or
distributor will require the consideration of several items and attempted negotiation of:
Extended terms on your invoices in order to delay payment
The right to return poor quality merchandise directly to the manufacturer
The exclusive right to sell the manufacturer's products in your territory
Minimum order size (larger is better from the manufacturer's point of view)
Turnaround time from order to delivery
...
Many business textbooks, when describing the flow of products in the marketing
channel, show the arrows moving from producers to consumers
...
Wholesalers and
distributors in the middle of the channel need to be concerned about promotion and
service moving in both directions
...
Wholesalers and distributors need to inform producers and retail store buyers
about the types of services they perform
...
B-to-B
relationships extend beyond the movement of product
...
The relationship also allows for discussions concerning price changes and technological
changes in existing products
...
Even though manufacturers sell to wholesalers
and distributors in the B-to-B markets, it is essential that the firm seek answers to many
questions about the end user
...
For example,
what advertising vehicle will hit the target market defined as teenagers 12 - 18
years old? What about the target market of working mothers?
What strategies can be used to create demand for a new product or stimulate sales
for an existing product?
In response to the last question we next discuss two major strategies that can be
used at all levels in the distribution channel but particularly at the manufacturing level
...
The Push Strategy
We start the discussion by presenting a very common problem experienced by
new producers
...
To get the product to the consumer, the firm will need to move it through
the distribution channel
...
Retail stores have only so many square feet of space to display products
...
Each square foot of space in a retail store
is valuable
...
Each tree in the orchard produces revenue just as each set of store
shelves produce revenue
...
Both need the right mix of products and care at that exact spot
...
In the case of a retail store, the right mix to
generate maximum revenues consists of location, parking, building design, interior
shelves or stands, the buying and placing of products, pricing products, presentation, and
finally the sale at the checkout point
...
Every time a product leaves the shelf and ends up at the cash register, the retailer
brings home the money
...
Here then, is the manufacturer's problem
...
The problem moves back through the distribution channel since the wholesaler
will not carry a new firm's product unless the retailer is going to buy it
...
They will only stock products with a high turnover, which is
dependent on the retailer having a high turnover
...
Advertising in trade
publications, such as magazines and newsletters that wholesalers and retailers in a
particular line of business read, will inform the professional buyers of your existence
...
Price promotion
could be one free case with every twelve cases
...
Maybe firms in the channel would prefer to have a price discount rather
than free product
...
Maybe instead of a price discount, a firm could offer free shipping
...
For a new product, perhaps
shipping in small quantities is preferred, since there is less risk for everyone in the
distribution system
...
Another way to push a product is to provide sales training to other members in the
channel
...
This type of
training is important in high priced goods such as furniture or technical products such as
computers
...
This method of promotion can be very
expensive
...
The Pull Strategy:
Now, imagine starting a business and despite your effort of making a quality
product, pricing it strategically to penetrate the market, and promoting it throughout the
marketing channel, you still cannot reach the break-even point (that is, make a profit)
...
If, after careful study,
you are convinced the end consumer wants the product but the distribution system will
not make room for it, you have three choices
...
You can quit
...
If the firm was undercapitalized, that
is, started without enough money, then there may not be any other choice
...
Running out of money might occur because
the entrepreneur seriously underestimated the length required to penetrate existing
markets
...
But once a business is started, it
may take some time to earn the funds needed to keep the business working
...
This is the money to keep people on the payroll, pay the electric
bill, manufacture product, etc
...
Even with the most
talented managers possible in each area of the firm, the firm will be in serious trouble if
management has not taken the time to strategically integrate each of the firm's operations
into a complete business plan
...
The second choice is to eliminate the middleman in the marketing channel
...
This option is generally used
only when the manager of the business is also the owner or at least one of the major
stockholders
...
Using this strategy, as an owner/manager of a small manufacturing company, you
would load some of your product in the trunk of your car and stop at every retail outlet
that will listen to you
...
Sometimes, though, the
people running the retail stores remember themselves having taken risks and engaging in
the battle
...
The hope is that the customer
will buy it and the store will reorder
...
The wholesaler, knowing that
his/her customers are already buying your product, will then stock the product
...
It sometimes
works because you made it a personal challenge and enlisted the help of retailers
...
The third option, if you cannot push your product or service fast enough through the
marketing channels, is to go directly to the end consumer
...
This strategy is called the pull strategy
...
When retailers order, this
"pulls" the product through the distribution channel
...
This strategy might involve getting the public's attention with free samples
...
Do a television commercial
...
Have glossy brochures to hand out
...
This
strategy might be possible if your customers are in a small geographic region, served by
local television and radio stations
...
Products used by another business can be pulled through
the channel by direct mail to the target firms, by phone calls, Web advertising or personal
visits
...
Rather than wait for the gradual development of the
market, it might be faster (and more profitable in the longer run) to both push and pull the
product through the marketing channel
...
Large firms have the funding to send free samples via the mail system
...
They
can run prime time ads and back up the national campaign with coupons in magazines
and papers
...
Market research and test marketing can
reduce the failure rate, but in the end, for the global corporation and for the small start-up
venture, the product must fill a customer's need, it must be at the right place at the right
time, it must be priced according to the value perceived by the customer, and it must be
promoted in such a way that they know of its existence and desire it to fill a perceived
need
...
They can do so in a one-way communication targeted toward
a set of intended receivers
...
Businesses use many types of symbols to communicate the value of a
product or service
...
Most of
us recognize some company symbols, such as the "golden arches" of McDonalds
...
Businesses also use people as product symbols
...
Jackie Joyner Kersey, a famous Olympic track star for instance, was
a spokesperson for Nike
...
Of course, having a person as a product symbol can be risky
...
Rodman made some
disparaging remarks about Mormons during the 1997 championship series
...
, which had used Rodman in some of its
television ads, yanked him permanently from further TV ads
...
Public relations is directed at building the image of the company, and can be either paid
or not paid
...
Larger companies have public relations
departments that send press releases to media in the hopes of getting the stories aired or
published
...
Direct marketing is when a person (receiver) gets a message through a nonpersonal channel, such as mail, magazine, television, newspaper, or computer and orders
the product by mail, phone, or computer
...
For a marketer, personal selling is communication in a setting where the seller can
anticipate questions, or answer direct questions from the buyer
...
This is an interesting relationship, since, in
some cases, the seller might not want to communicate certain information about the
product, and might not "communicate" fully, or may falsely communicate
...
A sales promotion is any activity initiated for the short term to induce sales to
any channel member or final consumer
...
Quantity discounts to retailers or
distributors are examples of sales promotions to channel members
...
Each element serves a specific purpose
...
Public relations
help to build and maintain a positive company image over time
...
Personal selling allows a company
to provide different levels of information to buyers, and to answer product-related
questions
...
Direct marketing allows marketers to reach buyers who may be difficult
to reach in other ways, or to reach them more cost-effectively
...
V
...
One-way introduces
the product and sets the stage for two-way selling, (automobiles, dishwashers,
televisions, life insurance, etc
...
These firms may provide
small video monitors in retail outlets to demonstrate the proper use of their product as
well as the product advantages to consumers
...
This allows the manufacturer direct access to the end consumer interested in
that type of product
...
And, the promotion hits a narrowly defined
target market (in this example, customers in the store are interested in home
improvement)
...
Tradeshow
promoters rent a large convention hall and sell space (booths) to manufactures of
products, distributors, and service providers
...
The trade show is closed to the general public
...
The video helps inform the buyer who otherwise might not have the time to
wait for a conversation with the seller
...
Like shelf space in a supermarket, the
prime booth space is very expensive and goes to established firms
...
Still, even a remote
corner might be a better promotion technique than carrying samples around in the back of
the entrepreneur's auto
...
This one-way package advertising provides assurance to the buyer that if there
is a problem with the product, two-way communication with the service provider or
manufacturer will be possible
...
In starting a new firm, the entrepreneur seeking to promote the firm's service or
product might hire a marketing executive or contract with a marketing consultant
...
A person with specialized knowledge about
consumer behavior, market research and advertising might be added to the promotional
campaign team
...
For new firms, it can be a difficult process to determine the value of advertising
...
If the firm has high fixed costs and needs to sell a
large number of units as soon as they go into operation, then advertising is essential
...
62
Chapter 4 – Marketing – The 4 Ps
Pricing
How does a business decide on a price to be charged for a product or service?
There are three choices to base price on:
Cost
Competition
Demand
Price Based on Cost:
What price should a manufacturer, wholesaler or retailer put on a product? It is
common sense that in most cases the price needs to be higher than what it cost the firm to
make or buy the product
...
When a product is manufactured it will have a labor cost and a raw material cost
...
Assume
15,000 units are made at a total labor and raw material cost of $900,000
...
The answer of $60 per unit is called the variable cost
...
If no units are produced, variable
costs are zero
...
Should you charge something more than $60? Yes, you need to cover other costs,
and make a profit
...
00 for each unit they
sell? Add another $4
...
(Now variable cost is up to $64
per unit)
...
Commission
Total Variable Costs
$ 60
$ 4
$64
To set the price, suppose the president of a company decides to mark the product
up 25% over variable costs
...
$64 x 25% = $16
$16 + $64 = $80
The $16 difference between price and total variable costs per unit is called the
contribution margin
...
Unit Price, Variable Costs,
And Contribution Margin
63
Chapter 4 – Marketing – The 4 Ps
Price
$ 80
Production Costs
$ 60
Sales Rep
...
This amount is called gross
profit
...
The key figure to look at from the stockholders point of view is not gross profit, but profit
after expenses and taxes have been paid, called net profit
...
Or, if the profits are
currently in cash, they can pay all or some of the profit out to stockholders in the form of
dividends
...
These are expenses, called fixed
expenses, do not change in the short run, and do not change as a function of units
produced
...
For
example, managers and rent must be paid even if no units are manufactured
...
Suppose you have the following fixed expenses:
Rent
Manager's Salary
Advertising
Total Fixed Expenses
$ 5,000
$ 50,000
$ 50,000
$ 105,000
Let's look at where we stand regarding sales revenues and all costs, both fixed and
variable
...
Step one is to determine gross
profit (total sales revenues minus variable costs)
...
Step two is to determine net profit by subtracting expenses and taxes from the gross
profit:
Step 1:
$1,200,000 (sales revenues) - $960,000 (variable expenses) = $240,000 (Gross Profit)
Step 2:
$240,000 (Gross Profit) - 105,000 (fixed expenses) - 40,500 (taxes) = $94,500 Net Profit
Income Statement
Total Sales Revenue
$ 1,200,000
64
Chapter 4 – Marketing – The 4 Ps
Production Costs
Commissions
Total Variable Expenses
Gross Profit
Advertising
Rent
Salary
Total Fixed Expenses
900,000
60,000
$ - 960,000
$ 240,000
$
$
$
50,000
5,000
50,000
$ - 105,000
Net Profit before tax
Taxes 30%
Net Profit after tax
$ 135,000
$ - 40,500
$
94,500
Price Based On Competition:
Assume a marketing manager finds out that an established, competing firm is
selling their units of a similar product for $76
...
Therefore, he/she may suggest lowering the unit price to $74
...
This leaves less money for covering expenses and
squeezing out a profit
...
This point is called the break-even point
...
We know that if we sell one unit at $74, we have a Contribution Margin of $10 to
cover Fixed Expenses
...
Commission $ 4
Less Total Variable Costs
$ 64
Contribution Margin
$ 10
To find out how many units a firm must sell to break even, divide the total fixed
expenses by your contribution margin
...
Examine the sample income statement below,
which shows 10,500 units sold at $74 per unit
...
The President in our scenario responds, "Well darn, lets make the whole 15,000
and sell them at $74 each
...
On unit number 10,501 we
start making a profit!"
The finance officer chokes at that comment, as does the marketing executive
...
"We don't want
production to get too far ahead of sales
...
That is 4,000 x $60 or $240,000 we have in product instead of cash
...
"
The President then turns to the marketing member of the team and asks, "How
many units can you sell?"
Regaining composure, she responds to the question
...
We will win
over some of the competition's clients based on price alone
...
"
Making a product or service that is somehow different from that of the
competitors is called product differentiation
...
Product
improvements and better quality standards are a good way to differentiate
...
The firm that has been able to differentiate its product has the option to not raise
its price, but to keep the price near that of the competitor
...
Market share is the percentage of the market you service
...
00 will "beat" the competition,
resulting in the firm gaining some of the competitor's market share
...
The marketing manager needs to
66
Chapter 4 – Marketing – The 4 Ps
forecast demand for their industry and then estimate the firm's market share within that
industry given the firm's price of $74
...
First, the firm must estimate demand for
the entire industry
...
Hopefully, an industry association representing all the firms in that industry has been
collecting data
...
Once industry demand has been forecast, the firm must estimate what its share of
industry demand will be at a price of $74
...
00 would the firm get a lot more market share? If they charged $75
...
Demand is dependent on each of the 4P's
...
It is the only variable that
makes money
...
Economists study the relationship of demand and price, and these relationships
are presented in economic and marketing classes
...
That does not mean the decision-maker should disregard the
price/demand concept when setting price
...
An automobile you might
consider is a Lambourgini
...
Exhibit 5
represents the relationship between price and demand
...
If the dealer raised the price by $10,000 do you think demand would fall?
The answer is yes, but not by much
...
What if the dealer kept raising price by $10,000? What if the
dealer lowered the price in $10,000 increments? Would there be more buyers at
$200,000? While there would probably not be a long line of people wanting to buy, a
few more customers might come in to inspect the automotive piece of art
...
On the lower end, if the price dips too low, richer clients would not see
the vehicle as an elite, expression of high-speed art, but simply as another high-powered
luxury sports car in an already crowded market
...
What other products might have a price/demand relationship expressed by
the curve in Exhibit 6? Do you think the more expensive lines of perfume might have a
similar curve (using, of course, different dollar increments on the vertical axis)? What
about designer clothing or shoes? Someone willing to pay $200 for a pair of tennis shoes
probably would not buy that pair of shoes if just anyone could buy them
...
Sales may be equally low at both price
extremes if people would be willing to pay just $20-$50 more than the lowest-priced shoe
to buy a slightly more popular brand of shoes
...
This also means that if price is
lowered, it will not generate many additional unit sales
...
This type of curve is defined as inelastic
...
When the slope of the line is moderate to flat, a change in price can have a major
impact on demand
...
Exhibit 7
Price-Demand for Candy
0
...
70
Price
0
...
50
0
...
30
0
...
10
0
...
19
0
...
15
0
...
11
0
...
07
0
...
Exhibits 5 and 6 show curved relationships as price moves into extreme ranges
...
We have identified two products with unusually curved
demand functions
...
From the
data, the marketing manager estimated that at $74
...
But, since the demand is so elastic, if the price were $70, the marketing manager
expects they could sell 15,000 units in total
...
What is their profit at $74 and what is it at $70?
$74 x 11,000 units = $814,000 total sales revenue
$70 x 15,000 units = $1,050,000 total sales revenue
But remember this does not take expenses and taxes into account
...
It is important to consider all aspects of pricing including cost, competition and
demand
...
70
Chapter 4 – Marketing – The 4 Ps
Pricing can be viewed in the short run and longer run
...
If one thinks strategically, the question should be
asked, "What will the reaction of our competitor be?" If the lower price generates new
demand and does not simply "steal" the competitor's clients, then the competitor might
not do anything
...
That is the assumption in this case
...
This move runs the risk of a price war, where firms compete for customers by
lowering price
...
Every action by a firm invites a reaction
...
Some executives and individuals in
their personal lives carry this action/reaction thought process to the extreme
...
Such thorough analysis can lead to two problems if
carried to the extreme
...
Ideas should not be rejected because something might go wrong
...
The gain sought must be worth the risk taken
...
Before enormous amounts of resources are spent analyzing a minor
problem, review the cost of improving the odds of making the perfect decision versus the
consequences of making a poor decision
...
In other cases, some problems are worth a lot of
time and money in order to avoid a poor decision
...
Some individuals cannot accept making poor decisions, as it
reflects on their personal egos
...
They may make fewer mistakes but they will make far fewer
decisions
...
These words are usually used interchangeably and refer to
the percentage increase or decrease in price between different channel members
...
The retail price method is often used when competing products limit increasing
the retail price
...
The manufacturers will have to live with the resulting price at which they can sell the
product to other channel members
...
71
Chapter 4 – Marketing – The 4 Ps
Manufacturers and providers of services that have successfully differentiated their
products have gained marketing power in the distribution channel
...
In
this case, the margins are computed on a cost basis as the product moves up through the
distribution channel, starting from the manufacturer and ending with the retailer
...
This is followed by examples of computing
margins when manufacturing cost is used as the starting point in the channel
...
You
sell your shoes to specialty shoe stores
...
Suppose the retailer is selling your competitor’s shoes at retail for
$100
...
40) = Manufacturer's Price
or
$100 x
...
If the retailer then
took their standard 40% markup, your product would sell in their stores at a price of
$100, which would match your competitor’s price
...
The distributor probably has the shoe store
as a customer already
...
As an example, imagine that the distributor requires a margin of 7% for this service
...
The decision you, as the manufacturer, must make is,
should the 7% come out of your $60 or should the cost be added to the $60
...
Using the formula above, calculate how much you, the manufacturer, get for a
pair of shoes sold to the distributor, if you take the 7% out of your $60:
Distributor’s price x (1-% markup)
$60 x (1-
...
93) = $55
...
00
$ 40
...
20
$ 55
...
80 for a pair of shoes, and sells the shoes to the
retailer for $60
...
The retailer simply sends the $60 check to the
distributor instead of the manufacturer
...
20 per pair
for the services of the distributor
...
In this case, the manufacturer must have $60
...
Assume that you sell direct to the retailer
...
40) = retail price
or
$60 divided by (
...
The manufacturer gets $60, and
the retailer keeps $40, after selling the shoes for $100
...
In this example, the manufacturer's price to the distributor is
$60
...
07) = distributor’s price
or
$60 /
...
52
Distributor’s price divided by (1 - % markup)
$64
...
40) = retailer’s price
73
Chapter 4 – Marketing – The 4 Ps
or
$64
...
60 = $107
...
53
$ 43
...
52
$ 60
...
That is, always "divide" going up the
channel and multiply going down the channel
...
53
...
If you are the manufacturer, you like the second
way
...
If your shoes are about the same as
the major competitors' shoes, for which consumers pay $100, then you might have to
price no higher than $100
...
In this case you could
charge the $60 dollars per pair to achieve your profit objectives, and consumers would
pay $107
...
Margins on Cost:
In some industries it is traditional to price at some margin above what it costs to
manufacture the item for sale
...
Cost will be the contractor’s unknown cost plus a known margin
...
Defense is another
...
Assume that you are a builder of residential housing
...
Suppose it costs you
$200,000 to build a house
...
10 x $200,000) = $220,000
Pricing on cost reduces some risks to the manufacturer
...
In the situation where you had contracted to build a house, your buyer might not
be willing to pay both the cost increase and the 10% markup on these additional costs
...
If cost increases can be passed on to the client, the
contractor might forgo the 10% markup on the new costs and just pass the costs on
without the 10%
...
The initial bid and contract pricing agreements
74
Chapter 4 – Marketing – The 4 Ps
are based on existing price/demand relationships
...
If the contract has no provision for control over cost, it is more money in the
contractor’s pocket if they can drive up costs
...
Key Words:
4 P's
Advertising
Agents
Brand Loyalty
Break-Even
Brokers Competition
Commission
Contribution Margin
Cost
Demand
Direct Marketing
Distribution Channel
Elastic
Fixed Expenses
Gross Profit
Inelastic
Infrastructure
Inventory
Manufacturers
Margins
75
Market Share
Markups
Name Recognition
Net Profit Personal Selling
Place
Price
Price\Demand
Product
Product Differentiation
Promotion
Public Relations
Push Strategy
Pull Strategy
Sales Promotion
Sales Representatives
Subsidize
Undercapitalized
Variable Cost
Wholesaler
Working Capital
Chapter 5
Marketing Strategy
This chapter discusses marketing strategy and its role in setting
competitive marketing actions of the firm
...
Strategy gives a firm
direction
...
76
Chapter 5 – Marketing Strategy
MARKETING STRATEGY
Interestingly, a dictionary definition of strategy is generalship, or the art and
science of war in planning and directing large military movements and operations
...
About 2500 years ago, a Chinese general, Sun Tzu, wrote what is
now a well-known book among military thinkers, The Art of War, in which he set down
rules for successful military actions
...
In fact, some businesspeople think of running a successful
business analogous to waging war on competitors
...
In fact, war drove the development of
techniques for leadership, organization, and competition
...
The business
application of this strategy is to know your competitor’s strengths and weaknesses and
know your own firm’s strengths and weaknesses and to know the competitive
environment of the industry
...
He who can modify his tactics in
relation to his opponent and thereby succeed in winning, may be called a heaven-born
captain
...
The firm must continually change its tactics in relation to those
of its competitors in order to succeed
...
A firm without a clear direction for competition is likely to fail
...
Likewise, in business, if you don’t know where you want to go, any plan
will take you there
...
Combining marketing
resources means using the elements of the marketing mix – the product itself, price,
promotion (and advertising) and place (distribution) to achieve some marketing objective
...
Exhibit 1
Objectives
Strategies
Tactics
Measurement
We can think of the objectives as the “what” a firm wants to accomplish, the
strategy as the “way” to achieve the objectives, and tactics as the “how” to achieve the
objectives
...
For
77
Chapter 5 – Marketing Strategy
example, suppose a shampoo manufacturer wants to increase its share of the market by 5
percent in the next year; or increase sales by $2 million
...
Strategies are general statements about the way the firm plans to achieve
objectives
...
It might also
increase the distribution by getting more retailers to carry the product
...
Tactics describe
specific actions
...
It might also implement coupon program
giving consumers 50 cents off the retail price of the product
...
The tactics would specify what the displays will look like, how much they will cost, and
how they should be placed in stores
...
Measurement can be done at different points in time – monthly, quarterly or annually, or
example
...
Suppose the firm saw
market share increase only three percent
...
Perhaps, during the year, competition increased
substantially and it became unrealistic to expect share to increase by five percent
...
78
Chapter 5 – Marketing Strategy
Exhibit 2
Objectives, Strategy and Tactics
Objective (what)
Strategy (way)
Increase Market Share by
5% within the next two
years
Product: design a new product
for the market
Price:
Low (introductory) price
during product
introduction
Tactics (how)
Develop a new
shampoo/conditioner targeted
“outdoors” market
...
Offer low price to new
retailers
Promotion and Advertising:
Promotion:
Coupon program
Retail Support
program
Advertising
Retail cooperative
advertising program
Place (distribution)
Increase number of
retail outlets
Price at $10
...
,
which is 7%below the current
product to encourage trial and
repeat purchase
...
$
...
Offer coupons for four weeks
...
Install
displays two weeks before
advertising and coupons come
out
...
Allowance will last
for six months
...
These should be in major
metropolitan areas, and should
have beauty aid/supply sales of
at least $200,000 year
...
Perhaps the best way to get more market share
would be to change the product, not lower price
...
Finally, the tactics
might not have been implemented well
...
Perhaps the retail displays were not attractive
and did not catch the eyes of consumers
...
Exhibit 2 gives an example of the relationship
between objectives, strategies and tactics
...
There are entire books written
about marketing strategy
...
This describes approach to looking at “generic” or very broad strategies
...
Exhibit 3
Lower Cost
Broad
Target
Competitive
Scope
Differentiation
Cost Leadership
Strategy
Differentiation
Strategy
Narrow
Target
Competitive Advantage*
Cost Focus
Strategy
Differentiation
Focus Strategy
*From Michael Porter, Competitive Strategy, New York
Free Press, 1980
As shown in Exhibit 3, a firm can choose to concentrate on being a cost leader, by
adopting strategies that allow it to produce at lower costs than its competitors
...
Or, a
firm might choose to compete primarily based on differentiation of its products from
those of its competitors
...
Each of these major strategies can be focused on either a broad market or a narrow
market (defined in terms of consumer mix or geography)
...
Exhibit 4
Porter’s Four Generic Strategies
80
Chapter 5 – Marketing Strategy
Cost Leadership:
Cost leadership comes about several ways
...
Cost leadership can also result from
tightly controlling costs such as overhead, distribution (through efficient distribution
methods), and avoiding markets that do not return good profit relative to costs of doing
business
...
Differentiation can come about through product design, distribution, customer service,
technologies or other ways of making the product or its offering appear unique to
customers
...
For example, a firm might choose to concentrate on the female market, or on
the age group 18-24
...
Or, a firm might
focus geographically
...
The assumption of the focus
strategy is that a firm can be more successful selling to a smaller market than to a larger
market
...
In a
cost focus strategy, the firm seeks to be a low cost leader in its target market, while with a
differentiation focus, a firm seeks differentiation within its target segment
...
It might develop unique (differentiated) products for this market
...
Your team will need to decide if the firm
will sell just in Area 1, Area 2, or both Area 1 and 2
...
The decision to sell in both areas will increase your team's knowledge about the
environments in which your firm might operate
...
Product is
the life of your company
...
Your firm needs to order products (also called finished
goods) in large quantities from a manufacturer and then resell the product in smaller
quantities to professional retail store buyers
...
You must also order product for your first trial decision, which provides you a
learning opportunity without risk
...
Determining How Much Product to Buy:
Forecasting demand will give your firm an estimate of the units to order for each
product in each area
...
For your first trial decision, your firm has no history and
thus no previous quarterly data
...
Keep your
estimates and measure how close you came to the actual numbers when results are
released
...
The market research data you gathered in the forecast and the actual trial run will be
of great value when forecasting demand for your product in the first real set of decisions
...
Your teams vision for the firm's market share per product per area
...
Each firm has an incredible
impact upon their market group
...
In a market group where firms (on average) are spending very little
on advertising, growth in total sales for the group will be very slow
...
In any case, total unit sales each quarter will be different for each market group,
depending on the number of firms competing and how they elect to compete within that
market group
...
Determine the current quarter in which your firm will be making its
first trial decision (Q1, Q2, Q3, Q4 are each 1/4 of a year with Q1 being the January,
February, March season)
...
Next, use
the table below to find the total unit sales potential for each market group
...
You
will have serious forecast errors if you fail to match the information from the table below
with the appropriate quarter you are making decisions for
...
In the vision statement or related objectives, your team should have defined the
percentage of the total market you will attempt to capture (for each product in each area
you elect to sell in)
...
In the table above there is a large range between the low and high estimates for
total unit sales potential for both Product 1 and Product 2
...
If your firm is riskaverse, use the lower end of the estimates in the table
...
If your firm is only
willing to take on a moderate amount of risk, use some number between the low and high
estimates in the table above
...
The vision statement for Firm A stated that they planned to
capture 20% of the market share for Product 1 in Area 1
...
Therefore, Firm A used the low end estimate for total
unit sales potential for A1P1 listed in the table
...
It is Quarter 2
...
Firm B is very aggressive and willing
to accept risk in order to achieve their vision
...
20% x 37,500 = 7,500
Based on this calculation, Firm B would purchase 7,500 units of Product 1 for delivery to
Area 1 for their first trial decision
...
Be sure your team has discussed and reached a general consensus about the firm's risk
tolerance
...
For the two trial decisions you will need to contract with Peacock
Industries to purchase your Finished Goods
...
Thus, if you were to enter decisions to market both products in
both areas, you would need to place four separate contracts to purchase units
...
Before we continue with the ordering
process, we need to discuss the manufacturer known as Peacock Industries
Peacock Industries:
Peacock Industries is an administratively run supplier
...
Orders for product will almost always be filled
...
Keep an eye on the news to make sure that
Peacock Industries is continuing to operate smoothly
...
Do not attempt to make
other types of contracts with this firm
...
All firms that place orders
with Peacock Industries will do so using the following contract identification number:
Introfirm 18
...
You must specify the price of the product
...
Peacock will not negotiate price
...
Before
entering contracts with Peacock, always check the current Peacock prices listed in the
Dollars and Scents Quarterly (linked as “News” from the Globalview homepage)
...
Contracts entered with Peacock above
Peacock asking prices will be accepted at the higher rate
...
You do not need to
negotiate with Peacock Industries for quantity or price
...
The contract requires you specify the where the freight
company should pick up the product and the area where it should deliver the product
...
Making Your Contract
You will need to enter a contract for the total number of units your firm wants to
sell in this first trial run, by product and by area
...
If your firm has decided to sell only one type of product
in one area, then you would only enter one contract
...
Contracts Run Time
The contracts program runs before the main Global View firm decisions
...
That is the good news
...
This means your cash account is reduced immediately to pay for
your contract purchase(s)
...
The good news is that the bank
will cover your purchases even if you have no money in checking
...
*Special $$ Tip: Always avoid special loans if at all possible
...
To pull this money saving technique off,
marketing should be forecasting the need for product a quarter ahead so finance can get
the money ready to pay for the finished goods
...
In future quarters, special loans can be avoided with careful planning
...
The finished goods are shipped COD which means Collect On Delivery
...
The simulation automatically allows the bank to handle the order as a letter-of-credit
...
That is 9% per quarter, which is well worth making sure that your firm
always has money in the cash account to cover future contract purchases
...
Promotion
The third P to consider when making your first trial decision is promotion
...
Your team can
pick one marketing strategy for all products your firm will sell, or the team can have a
different marketing strategy for each product being marketed in each area
...
Advertising budgets are set per product per area
...
The size of advertising budgets is a hot topic of discussion in real life firms
...
Measuring how effective advertising dollars are in
generating sales is a very difficult process
...
If Pepsi increases their budget by 10% but
Coke does not, what will happen? If both firms increase budgets by 10% what will
happen? Do you advertise to generate brand new customers or to "steal" an existing
customer from another firm?
A solid advertising budget per product per area might start out at $10,000 to
$25,000 per product per area depending on market share aspirations
...
BUT, if your competitor(s)
87
Appendix A – The First Trial Decision
becomes large enough that their ad budget starts to bring in your customers instead of
new customers, you must react
...
The best you can hope for is a modest ad campaign to create a "holding" action (that is
hold on to your remaining market share)
...
Just like Coke and Pepsi, competing firms must defend themselves by continually
increasing ad budgets without generating much if any in new sales
...
A firm that has a vision of being a niche market firm, selling few units at a very high
price, would need a moderately small sales force (3 to 6 per area)
...
A firm with high
ambitions of capturing huge market shares would need a large sales force to make their
vision possible
...
Hiring more than 20 sales reps per area will not increase
sales volume, but it will definitely increase expenses
...
There is a one-time hiring fee of $12,000 per experienced sales rep hired
...
Size of Sales Force in Training
Trainees are sales reps in training
...
The following quarter, the trainees will be ready to be placed as
sales reps and will join your existing sales force
...
Combined, this $6,000
charge is half the cost of hiring an experienced sales rep
...
However, in the real first run we recommend some combination of sales reps
and trainees in order to "ease" the strategy into place
...
Compensation For Sales Force
There are two methods for compensating your sales force
...
There are four basic compensation strategies
...
For example, a niche market firm could expect to sell few units of product, but
have a high margin on each unit
...
A niche market firm needs a high salary because sales
reps won't make much on commissions since they are selling so few units
...
A firm on the opposite side of the spectrum, with a vision of selling cheap product
in large quantity, would do better with a low salary, high commission strategy
...
Salaries for sales reps typically range from $1,000 to $4,000
...
Toward the
end of the simulation, after several raises, salaries might range from $1,500 to $8,000
...
Typical commission rates
for sales reps range between $
...
00
...
Toward the end of the simulation,
commissions typically range between $
...
00
...
If you start
paying $1,000 salary and $
...
Then you must respond or you will lose market
share
...
Credit Policy For Buyers
Within the simulation, your sales reps are selling to simulated retail store buyers
...
Upon
receiving the product and the invoice from your firm, some buyers will pay your firm
immediately
...
Some stores that
want your product will have very good credit, while others do not
...
Your firm needs to decide on some type of credit policy, which will define the
credit standards buyers must have in order to buy your product
...
You will allow anyone and
everyone to buy from your firm, regardless of their credit history
...
89
Appendix A – The First Trial Decision
2 = Your firm will not allow those retailers with bad credit history to buy
from your firm
...
Buyers must supply a positive credit reference
...
Buyers
must have a positive credit reference
...
5 = Retail buyers must have excellent credit, a bank reference, and have
been in business for at least two years
...
A firm with a credit policy of zero will have more
buyers but they will also have a higher bad debt expense
...
Experiment to find the credit policy appropriate for your firm
...
Compare bad
debt losses divided by sales
...
Quality Control Budgets
Quality Control is one of the most important parts of your firm's marketing
strategy
...
As a distributor, your quality control budget will work in two ways:
To ensure you receive consistent, good quality product from your supplier
To ensure consistent, good quality product is shipped to your clients
To ensure that consumers get the quality product they expect
Your firm will contract with a manufacturing firm to produce your product
...
Therefore, your firm needs a good quality control budget to ensure that the product
received from your manufacturer is undamaged, the labels are on straight, the boxes are
in good condition, and the liquid content matches your quality standards
...
Once your firm has received product from your manufacturer and verified that the
quality is to your firm's standards, you must ensure the continued quality of the product
while it is in your care
...
If you ship damaged or defective product, your
customer will immediately ship it back to your firm to be replaced
...
In determining the quality control budget, your firm will need to closely examine
the marketing strategy
...
If
consumers were paying top dollar for your product, they would expect to receive a top
90
Appendix A – The First Trial Decision
quality product
...
Quality control decisions are entered as a total dollar budget
...
To ensure consistent quality, your firm should base the total quality control budget on
a per unit amount
...
Repeat consumers like to know what quality to expect from your
product
...
Consistency is good
...
75 cents to $4 per unit
Product 2 should range between $1
...
The quality control (QC) budget does not consider area (Area 1 or Area 2) only
the product type (P1 or P2)
...
Then, you need to figure out the percentage of that total
dollar budget to be spent on Product 2
...
75 cents on quality control for each unit of Product 1 and $1
...
Firm A will have 5,000 units of Product 1 in Area 1 and 5,000
units of Product 1 in Area 2
...
5,000A1P1 + 5,000 A2P1 = 10,000 Product 1
10,000A1P + 5,000 A2P2 = 15,000 Product 2
10,000 x
...
30 = $19,500
= total quality control budget of $27,000
91
Appendix A – The First Trial Decision
19,500 (total P2 budget) / 27,000 (total QC budget) =
...
Price is one
of the most critical decisions your firm will make
...
The price you set for your
product will attract a certain type of buyer
...
Also, consumers have a memory
...
If your firm decides to dramatically
increase the price of your product, yet quality and advertising stay the same, you will
most likely lose many customers
...
As you learned in your marketing chapters, there are three basic methods for
pricing
...
In the
trial run you only have a rough approximation of demand for your product(s)
...
As you start your real decisions you will have some idea of
demand and competitor's prices based on their trial runs
...
For now your firm should focus on covering fixed and variable
expenses plus earning a profit
...
Firm A will pay
a commission of $1
...
Therefore, Firm A's total variable
costs are $81
...
$80 (cost per unit) + $1
...
70 (variable cost for P1)
Next, determine the fixed costs you can anticipate based on decisions made by the firm:
Administrative expense
Advertising Budget
92
Appendix A – The First Trial Decision
Quality Control Budget
Sales Expense
Interest Expense
Example:
Firm A had the following fixed expenses:
$50,000 admin
...
$80,000 Advertising Exp
...
$20,000 Sales Exp
...
(interest expense from special loan)
For a total of $423,150 in predictable fixed and semi-fixed expenses
...
By dividing the total predictable fixed expenses by the total number of units
Firm A thinks they can sell, Firm A knows that they must have a markup of at least
$16
...
$423,150 (total estimated fixed and semi-fixed expenses) / 25,000 (units anticipated to be
sold) = $16
...
With this
information Firm A can begin making decisions about Product 1 pricing
...
62
...
Going into the trial run without experience we recommend a 20% before tax
profit margin be built in
...
63 = $19
...
70 (P1 variable cost) + $16
...
72 (margin)
= $118
...
Your team needs to consider your firm's vision and its marketing strategy
...
Your price for P2 will need to be moved up to reflect the increased costs
...
Perhaps it will accept a 40% or 60% margin if you are the only
firm in that market
...
93
Appendix A – The First Trial Decision
Financing the Firm
At this point, you have not yet studied finance, but you will need to make
financial decisions in this first trial decision
...
Pick the financing plan that best matches your firm's vision
regarding size and risk tolerance
...
The second trial decision is heavily focused on forming a good financial
plan that will meld with your firm's marketing strategy
...
The more signs shown the greater the risks or returns
...
If you have doubts
about the decision entry process, refer to Appendix G, which describes how to enter all
the decision and contract variables
...
After reading this chapter you should have a good idea of basic accounting
concepts, which you can then apply in the analysis of your first set of
simulation results
...
If you are one of those
students you might consider a career in accounting, management information systems or
finance
...
It is very
important, however, that you understand and can interpret financial information
...
You do not have to like it, but you do have to understand it
...
-Accum
...
Net Plant
Total Assets
1229950
0
0
0
Liabilities
748919 Accounts Payable
441188 Special Loan
0 Short Term Loan
Term Loan
Bonds
Total Liabilities
1229950
Equity
Common Stock
Other Paid In
0 Unamort
...
LIABILITIES: Portion of the assets funded by debt and owed to creditors
...
This report lists the assets of the firm and the dollar claim that various groups have on
those assets
...
Since it would be
relatively easy to change numbers and walk off with valuable assets, investors usually
demand that an outside accounting firm check how data is collected and used
...
Creditors and
owners insist that accepted accounting standards and procedures be used to insure that the
firm's financial statements meet a uniform standard
...
Let us examine the
details of a balance sheet
...
Common practice lists
the assets in order of their liquidity
...
Liquid means how quickly and how safely (without a loss) an
asset can be turned into cash
...
Therefore, the assets
listing on the balance sheet starts with cash (checking and money market accounts)
...
The right hand side of your balance sheet lists where the funds came from to
purchase the real assets on the left side of balance sheet
...
If creditors and
stockholders put money into the firm, the real assets had better equal what they put in
...
Either the accountant made an error or
there was a theft of real assets
...
Sometimes employees
take tools or finished goods
...
Businesses must find a way to monitor assets and employees without making
employees bitter about the lack of trust
...
That makes each clerk responsible and
accountable for the cash they handle - a good management practice
...
The sections are very important to the reader of a balance sheet
...
This section as a whole is called the
liability section
...
Liabilities
Borrowed or owed sources of funding
Indebtedness
Creditor claims
Debt financing
99
Chapter 6 -- Accounting
The important concept is that some person or group (creditors) have lent the firm assets
(usually cash) and the firm is obligated (usually evidenced by a written contract) to return
the cash by a specific date
...
If liabilities become too large, it would cast serious
doubt on the firm's ability to repay obligations on time
...
There are two measures that help determine if the firm is nearing its debt
load capacity
...
A measure often used to determine the ability of the firm to pay debts in the short
term is called the current ratio
...
The answer had better come out to be at least 1/1
...
A ratio of 1-to-1 is nerve-wracking for bankers
...
Accountants often divide the
balance sheet assets and liabilities into subsections to allow for easy visual calculation
of the current ratio
...
Just a quick glance will let
the reader determine the approximate current ratio
...
A measure to determine if a firm can repay its total debts in the long run is called the
debt-to-equity ratio
...
Again, a ratio of 1-to-1 makes creditors nervous unless the
firm is making consistently good profits
...
5/1
...
For example, if stockholders
put in one dollar and creditors put in fifty cents, total money invested equal $1
...
Equity:
Equity is the portion of the assets funded by the owners of the firm
(stockholders)
...
The sale of stock generates cash shown on a balance sheet with a corresponding
increase in equity denoting the source of the cash
...
In most
States, stock must have a stated value before shares of stock are sold
...
Many states place a tax on the par value so
firms understate the real value of the stock to avoid taxes on par value
...
The stock will be sold to the public in the initial public offering
for more than $1
...
The excess of the IPO sale price minus par value
must be recorded in a separate account often named a "surplus" or "other-paid-in"
100
Chapter 6 -- Accounting
account
...
2
...
Retained earnings is listed in the equity portion of the balance sheet
and keeps a running total of profits and losses the firm receives over its quarters
of operation
...
In the balance sheet used as a sample at the beginning of this chapter, the IPO was
400,000 shares sold at $3
...
The cash asset increased by $1,404,000
...
From the investor's perspective, they paid $3
...
The firm has lost assets (probably cash) in the amount of $172,990
...
The full loss is charged to the stockholders as seen in the negative retained
earnings account
...
Special Stockholder Accounts:
The “Unamortized Discount” account shows you took a loss on the sale of your
bonds
...
It may take
investment bankers months to prepare a bond issue and its underlying contract
...
Thus, when you have a $1,000 bond to sell at a set rate of interest, by the
time it is actually sold, you will probably be forced to lower the price in order to entice
buyers to part with their cash
...
For Example: Your $1,000 bond sells for $950
...
Here is the problem
...
You must
credit the cash account for the actual cash received, which is $950
...
Claims of $1,000 show corresponding assets of $950
...
However, tax laws require the $50 loss to be spread out over the life of the
bond
...
As with the sale of stock, tax laws now
complicate the recording of the loss on the sale of the bond and require adding another
account on the balance sheet
...
The prices were
discounted in order to sell all the bonds
...
This process is a fairly sophisticated accounting issue
...
You can watch the account as it decreases by 5% each quarter and is
charged off against your income, (as part of the interest expense) but you have no entries
or responsibilities for the account
...
Total Equity in this simulation is the sum of the four stockholder accounts
(common stock, other paid in, unamort
...
, retained earnings) and is shown on the right
hand side of the balance sheet
...
The
government wants its tax revenue
...
In order to keep tax
revenues somewhat stable and fair to everyone, the government set up rules that attempt
to match expenses with the life of the project
...
The same concept of matching revenues with the costs (expenses) to earn those
revenues is the basis of accounting theory
...
However, accountants
and the government view the factory as an asset and not an expense
...
The factory is only an expense as it wears out All
businesses must document and keep the original purchase price of the factory on file plus
all records of all improvements
...
This is called depreciation
...
Most people deposit their paychecks and monitor their checkbook balance
...
A
firm monitors accounting statements that use the concept of matching revenues with
expenses related to producing that revenue
...
Cash sales
b
...
Cash expenses
b
...
Cash expenditures already made and charged off as an expense over time to
match revenue (deprecation and bond discount)
102
Chapter 6 -- Accounting
In the sample balance sheet shown at the beginning of this chapter, the firm sold
$441,188 dollars worth of finished goods but they have not yet received payment for
those finished goods
...
Note that revenue (sales) and cash is not the same
thing
...
However, even with a large profit it might be short of cash if
a lot of sales "are stuck" in accounts receivable
...
Another employee, Sam, came around the corner of the loading ramp
...
The finished goods, at a cost of $3,500 were completely ruined
...
If
that were the only event and taxes were not considered, the income would show a loss of
$3,500
...
The decrease in assets would be offset by a reduction of $3,500 in the equity
section of the balance sheet, specifically the retained earnings account
...
Taxes also must be accounted for
...
Income Statement
How is a business able to track all activities and merge them together such that the
balance sheet at the end of one period can be updated to create the balance sheet at the end
of the next period? (In the simulation, a period is a quarter of a year
...
The tracking of and
reporting on the movement of vast amounts of products and dollars in this day seems to be a
reasonable thing to do
...
Operating the system before computers must have been
a time consuming and expensive task in "the old days"
...
Adjustments to any one balance sheet account, given a change has occurred, requires
that a second account must also be adjusted in order to maintain the balance on the balance
sheet
...
Accounts are generally maintained in
separate files and only at a certain point in time are they merged to determine the overall
103
Chapter 6 -- Accounting
position of the firm
...
If you want to determine how well the firm has done over the period,
simply look at the increase or decrease in the retained earnings account from last period to
this period
...
Management and investors as well as the government taxing agencies need better
tools to analyze performance
...
If assets went up due to
operations (a profit), then retained earnings went up on the balance sheet
...
In the simulation you can immediately judge management's performance of
operating the firm by looking at the income statement
...
How that number was determined is shown in detail
by gathering the data from the separate accounts
...
The income statement specifies over a certain period of time how much profit the
firm made or how much it lost
...
The general purpose of the income statement is to report all the revenues, both cash
sales and credit sales, for the quarter
...
If there is a profit, taxes are paid on part of that
amount, resulting in a profit the business can keep
...
If the owners (or stockholders) don’t take the profits (through dividends) the profits
remain invested in the assets
...
In the sample income statement note that the reported loss was $172,990
...
Balance sheet assets decreased
by $172,990 and in order to balance, stockholder equity was reduced by the loss as shown
by -$172,990 in retained earnings
...
Income statements show only that one period's activity
...
Key Words:
Accounts Payable
Accounts Receivable
Amortization
Assets
Current Ratio
Debt-to-Equity Ratio
Depreciation
Equity
Liabilities
Net Income
Net Profit After Tax
Par Value
Retained Earnings
Write Down
106
Appendix B – Report Analysis
Appendix B:
Report Analysis
The quarterly news, Dollars and Scents Quarterly, will provide your team with
information on the political and economic environment related specifically to your
industry
...
There are two categories of reports within the simulation: the Market Group
Report and the Firm Report
...
Subcategories of the Market Group Reports are:
The Economic Report
The Sales and Marketing Report
The Financial Report
The Firm Reports are confidential and contain specific information about how the
firm performed during the quarter
...
Subcategories of the Firm Report are:
The Credit Report
The Sales and Marketing Report
The Production Report
The Income Statement
The Balance Sheet
The Cash Flow
The Contract Report
Market Group Reports
Association Global View
Economic Report
Game-Wide Economic Data
Economic Index Current 109
...
0
0
...
0250
Advanced
110
...
00
107
Next Year
0
...
00
Introduction
108
...
00
Appendix B – Report Analysis
Economic Report
Economic Index:
This is a relative measure of economic activity
...
If we consider the current index of 109 in relation to the economic
forecast for next quarter (110
...
The higher the index number the greater the dollar
value of total products being produced and services provided
...
2% increase next
quarter, but a 2% decrease in economic activity by the end of the year (4 quarters from
this report)
...
However, when ordering product to be produced for
your firm a year from now, you should order less
...
If consumers
purchase your product at the exact rate they make money, then your product demand will
exactly match changes in the economic rate of growth
...
Automobile demand tends to fall faster but not rise
as fast, until consumer confidence also is high (next report)
...
Our recommendation is to assume your product demand rises and falls at
the same rate as the economic index
...
This is a safe assumption until experience allows
you make a different assumption
...
Workers produce the products and provide the service resulting in workers getting
paid, which in turn results in demand for more products and services
...
This
upward movement of prices for the same product or service is called inflation
...
Usually it is the more
wealthy people who benefit and those with limited or retirement incomes suffer
...
Businesses do not make new investments in a recession and consumers sharply reduce
spending
...
A slowdown in consumer spending will cause businesses to make
even fewer investments resulting in job layoffs
...
This cycle can cause increasing rates of job layoffs and lower
demand
...
Consumer Confidence Index:
This is a relative measure of the dollar value of a group of stocks
...
For reporting
purposes a set of selected stocks are measured each day (value averaged)
...
Two very famous sets of stock measurements are the Dow Jones Thirty
Industrials and the NASDAQ
...
A group or set of stocks, when consistently measured over time, creates an
index value, which provides a general indication of how all stocks are performing
...
In the simulation, the index value of 100 must be measured
over time in order to determine if value is going up or down
...
If the index is moving
down investors and perhaps consumers think business will not perform
very well in the next year or so
...
Sometimes businesses will cut back ordering
inventory even though consumer demand is stable
...
If the Bear-Bull index has a downward trend, it means that investors are less
willing to purchase stocks
...
However, in the year 2000, Mr
...
This is an entirely new consideration for
economists
...
Thus the Bear-Bull and Consumer Confidence numbers are almost perfectly
correlated in the simulation
...
Bill Rate:
A "bill" is a nickname for a treasury bill
...
To the buyer of the debt, a treasury bill is similar to a savings bond but it
matures or is ready to cash out in a matter of months instead of years
...
T-bills start at
$10,000 each
...
In financial papers such as The Wall Street Journal, investors watch the treasury
bill (or t-bill or bill) rate
...
If the United States government must pay the rate of 6%
annually, most firms will have to pay more
...
Prime Rate:
109
Appendix B – Report Analysis
The very best customers of a bank who need to borrow money for a short period
of time hope to borrow close to what the United States government must pay
...
If
the bill rate increases, banks will raise their prime rate accordingly
...
You will need to
watch the news in the simulation to see how the Federal Reserve System of the United
States and similar government controlled central banks of other countries are affecting
interest rates
...
The central banks regulate the supply of money and the demand for
that limited supply determines the interest rates
...
Exchange Rate
If you sell product in A2, that is the EU or European Union
...
The simulation starts both currencies equal in value
...
In this case the exchange rate equals 1 dollar to 1 Euro
...
1, when you sell your product for 100 Euros it takes
110 of them to equal 100 dollars
...
If you notice the exchange rate of the Euro going down to 1
...
53
0
12
$ 4
...
79
0
14
$ 3
...
73
0
16
$ 2
...
15
0
New Financing:
New Stock issue of 400000 shares at
New Stock issue of 300000 shares at
New Stock issue of 1000000 shares at
New Stock issue of 400000 shares at
110
Net Income
236541
187291
-45413
-117535
75633
-271201
-598403
3
...
34 sold by firm 2
2
...
56 sold by firm 4
Appendix B – Report Analysis
New Stock issue of 500000 shares at 3
...
34 sold by firm 6
New Stock issue of 1000000 shares at 2
...
Dividends per Share (Div/Shr):
Earnings per share) or "EPS" are the total earnings for the period divided by the
number of shares of stock
...
None of the sample firms issued dividends because it was their first quarter of operations
...
Firms 11, 12 and 15 had positive
earnings in their first quarter of operations as shown above
...
Firms, which issue dividends in their opening quarter or while
retained earnings are negative, are subject to fines of up to $50,000
...
Before they
can pay dividends they must earn enough to make up for the losses and have a positive
balance in retained earnings
...
The
dollar value shown is the money actually going to the firm per share
...
The value of the stock as it is sold or
exchanged to another investor is the dollar value listed under stock price in the upper part
of the report
...
Also listed under new financing is the amount of bonds sold by firms in the given
market group
...
721
1
...
857
Product 1 Product 2
$ 136
...
57
$150
...
00
$138
...
00
$130
...
00
$120
...
00
$300
...
00
$185
...
00
$140
...
00
Sales
Reps
2
3
5
6
7
10
10
Product 1 Product 2
5525
57282
0
0
0
22
167000
167000
0
439
1
...
821
2242
...
83
Euro
150 Euro
160 Euro
138 Euro
135 Euro
130 Euro
125 Euro
120 Euro
Sales
Reps
203
...
The
Sales and Marketing Report contains valuable information about your competitors
...
Total Sales (in units):
Total sales are listed by product and area
...
The seven firms
listed in this example had combined sales totaling 6,266 units of Product 1 in their region
(group), which is located in the NAFTA market (Area 1)
...
None of the sample firms shown in this chapter had any wholesale sales, so
there are only zeros in this category of the report
...
However, if a firm makes sales at an electronic tradeshow or if a firm
has a surplus of product and sells to another firm in the simulation, the total number of units
sold to the other firm(s) would be listed in this category
...
Total market group demand figures (important to forecasting demand) would be
exaggerated if a firm in your market group were selling product to other firms
...
Introduction to Business firms are almost always buyers of products from firms, not
sellers
...
Such an error will have triggered a need for large amounts of cash
...
You would be stuck
with very high interest charges and inventory storage charges
...
When you negotiate product price with another attempt to cover the cost of your
product and the 6% freight charge which you will automatically be charged for as the seller
...
Total Backorders:
Total backorders, listed by product and area, is the sum of the number of units of
backorders for each firm in a given market group
...
Total backorders are part of demand
for that quarter but are not listed with total unit sales
...
Total Advertising:
Total Advertising, listed by product and area, is the sum total of all advertising
budgets of all firms in a given market group
...
Sales lost are the total number of
units demanded which could not be filled due to a lack of product
...
The buyer was
searching for products with a particular set of price/quality/promotion characteristics
...
The administrator checked each firm's inventory in the above example and
found that five of the firms had plenty of P2 A2 left in inventory, yet there were ending sales
lost for P2A2
...
Most likely there will always be some ending sales lost within any given market group
...
It is possible that sales lost by one firm may be diverted to another firm
...
By analyzing their confidential firm reports, the firm that lost the
sales will know they lost sales
...
The lucky team thinks
they are just great marketers having earned great market share
...
The lucky team will not receive any lost sales orders and their income
will plummet along with market share
...
Given no other changes,
all the data would indicate that market shares should have stayed the same
...
You are no longer
lucky and instead must aggressively change your competitive strategies in order to
maintain market share
...
If confidential firm reports are supplied for each of the seven
firms in this example, add each firm's commission rate for Product 1 in Area 1, then divide
by seven (the total number of firms) to arrive at the average number shown in the above
report
...
If the confidential firm reports are available for all seven firms, divide
the total salary summed for each Area by seven to determine the average Area salary for this
market group
...
Area 1 prices are stated in dollars
...
To determine how area
2 sales revenues were calculated, it will be necessary to divide the Area 2 price by the
current exchange rate (found on the Economic Report)
...
96 (the current exchange rate) =
312
...
Your firm's revenues from the EU
will have increased $12
...
Note that the lower the EURO number
in relation to a dollar, the higher its value
...
96 to the dollar means it
takes only
...
00 of a dollar
...
114
Appendix B – Report Analysis
Firm Reports
Use the information presented in your firm reports to design your firm's first set of
decisions
...
Remember, you are entering a competitive environment and no
one knows ahead of time what your competitors will be doing
...
The following sample firm reports are full of great information, but you cannot
assume that the software model that drives the simulation is static
...
That is, the demand is not preset, but is dependent on the actual decisions made by the
participants in the simulation
...
We recommend that you concentrate your efforts
on how the market group is changing, how your competitors are changing and where you
should be positioning your firm, rather than playing against “the computer”
...
Association Global View
Credit Report - Firm Report
Credit Report
Credit Rating
Short Term Rate
Debt to Equity Ratio
1
...
708
0
...
The rating for your firm will affect the cost
of borrowing money
...
If you run out of cash, your credit rating
will automatically go to a 5
...
It will
never be negative
...
If
you see the nice round number of $10,000 in cash, check the liabilities section of the
balance sheet
...
Next, check your credit rating!
S
...
Rate:
The short-term borrowing rate is set by the bank and is adjusted each quarter
...
Each
firm in the simulation has an individual short term borrowing rate
...
The interest rate given is the annual rate
...
Debt-to-Equity Ratio:
Debt-to-equity is a measure of financial risk undertaken by the firm
...
The
ratio can be stated as a ratio such as 1-to-1 or it can be divided and read as a percentage
...
0)
...
A ratio of 0-to1 equity is ultra conservative
...
The firm represented in this example
chose to finance their firm entirely with stockholder investment money
...
01
...
5 will begin to worry both stock investors and bankers
...
5 ratio one will find two types of firms: high risk firms pushing financial
leverage to its maximum and firms that have lost a great deal of equity who are in
financial difficulty
...
Stock price in the simulation starts to suffer as the
firm's debt-to-equity ratio exceeds 1
...
As financial risk increases, investors lower stock
values at an increasing rate
...
0 debt-to-equity ratio? There may be
some exceptions
...
0 standard even if it initially hurts
stock price:
Use of debt resulting in a debt/equity ratio of 1
...
0 may produce additional earnings
per share (EPS), which would boost stock price
...
The firm must have very
profitable opportunities to make this strategy work
...
Issuing few shares
of stock and instead borrowing funds early to secure markets might produce large profits
by the end of the simulation
...
Eventually (if the firm survives the early
quarters) the firm will emerge near the end of the simulation with a low debt/equity
ratio, huge market share, huge profits and since they have so few shares outstanding,
huge, huge, huge EPS (earnings per share)
...
This strategy is very, very risky
...
00
3
...
00
300
...
0%
5
...
00
3
...
00
300
...
0%
3
...
Unit
Sales are the sum of current quarterly sales, wholesale sales, and last quarter's backorders
...
Wholesale Orders:
Wholesale orders are the total number of units sold to another firm within the
simulation
...
The firm in this example did not have any
contract sales and thus, wholesale orders are at zero for each product in each area
...
Backorders are first
in line to be filled next quarter, at last quarter's price or at the coming quarter's price if it is
lower
...
Units ordered will need to meet both your new forecasted demand plus
backorders
...
117
Appendix B – Report Analysis
Returns from either source are due mainly to poor quality control
...
If not sold, the reprocessed units
are included in the finished goods inventory
...
30)
...
Additional expenditures in quality control will help eliminate the return problem
...
Be aware that even your best quality control might randomly in such quarters still
allow some returns
...
However, damage may occur while in the warehouse
...
Even though the manufacturer you purchase from
may have an excellent quality control budget, your firm must also budget for quality control
...
The quality conscious firm should budget on a per unit basis, even though the
decision entry asks for the full dollar budget
...
We highly recommend you compare your
budget as a percent of total sales to that of your competitor
...
The percentage of sales,
in dollars, spent on quality control can be calculated to determine if your relative quality
matches the competition
...
Money spent in excess of zero returns, for example, can be used to
insure that your product exceeds the expectations of your consumers
...
The quality of your manufacturer is of little importance to you
...
If you have a
high budget the manufacturer must have matching quality products or the simulation will
automatically send the lower quality products back
...
It is assumed that if you do not have your own quality control budget, any
manufacturer can ship you junk and you will accept it at the receiving dock
...
Firms not waiting for delivery will seek product from another firm in your market group
...
118
Appendix B – Report Analysis
Sales Reps:
Sales Reps is the total number of sales reps in each area
...
Sales Commissions:
Sales Commission is the amount of commission paid to reps for each unit of product
they sell
...
Product Prices:
Product Prices are for each product in each area
...
Market Share:
Market Share is by product and area
...
Market share
calculations do not include Ending Sales Lost, Current Backorders, or Sales Lost
...
Given 8 firms (the maximum in any one market group), a "fair share" would be 12
...
In
our example, Firm 11 captured only 5% market share for Product 1 in Area 1
...
Association Global View
Production Report - Firm 11
Production Report
Area 1
Area 2
Product
1
Production Shift 1
Production Shift 2
Finished Goods Inventory
Inventory Unit Cost
Production Unit Cost
Raw Materials Inventory
RM units/FGU Product 1
RM units/FGU Product 2
Labor Hours - Shift 1
Labor hrs/FGU Product 1
Labor hrs/FGU Product 2
New Construction (hours)
Product
2
Product
1
Product
2
0
0
0
0
0
0
0
0
687
484
613
0
80
0
...
700
3
...
00
Type 2
0
12
25
Stage 2
0
2
...
500
0
Production Report
119
80
0
...
000
3
...
00
Type 2
0
12
25
Stage 2
0
2
...
500
0
Appendix B – Report Analysis
The production report is a subcategory of the Firm Report
...
The only information
your firm will use from the Production Report is the Finished Goods Inventory and the
Inventory Unit Cost
...
:
Finished Goods Inventory shows the number of units that remain in the firm's public
warehouse at the end of the quarter
...
After forecasting sales by area and product for next quarter,
subtract the units left in inventory to find how many units to order from your manufacturers
...
The contracts program allows you to order
any one product for any one area
...
Since the manufacturer pays for shipping it is must
cheaper to have them ship to each of your areas
...
You pay the freight bill if you ship in this manner
...
Inventory Unit Cost:
Inventory Unit Cost is calculated by averaging the unit costs of old inventory from
previous quarters with the new units purchased
...
In future
quarters, if there are some finished goods inventory carried over, the average inventory cost
will combine the old and new units purchased and provide the new weighted average cost
...
Association Global View
Income Statement
Revenue
Sales Revenue
Less: Processing Costs
Net Sales
Expenses
$1187219 Cost of Goods Sold
$1091 Advertising
$1186128 Quality Control
120
$460340
$40000
$36000
Appendix B – Report Analysis
Investment Income 0:000
Marketable Securities
Income Before Taxes
Net Income
$0 Bad Debts
$0 Product Improvement
Engineering Studies
Sales Expense
Administrative Expense
Invt/Shipping Charges
Maintenance
Depreciation
Interest Expense
Factor Cost
Miscellaneous Expense
$ 445762 Income Taxes
$ 233421
$2162
$0
$0
$27948
$50000
$1216
$0
$0
$56700
$0
$66000
$ 212341
The Income Statement
Sales Revenue:
Sales Revenue is calculated as:
Previous quarter's backorders x backorder price +
Sales to retailers this quarter at this quarter's price in dollars in NAFTA +
Sales to retailers this quarter at this quarter's price in Euros in the EU convert by the
exchange rate
...
The sales revenue for firm 11 is found as:
$150 (the sales price for Product 1 in Area 1, found on the Industry Report) x 313 (unit
sales for a1p1 this quarter)
...
25 x 387 =$60,468
...
50 x 2000 = $625,000
*$150 X 1/
...
25
*$300 X 1/
...
50
= Sales Revenue $1,187,218
...
Less Restocking Expense:
121
Appendix B – Report Analysis
This is the expense of putting reprocessed units back into inventory
...
There was
sufficient time to reprocess Firm 11's defective units and sell them again
...
The original sale, which included the 12 defective units, was not affected as the
defective units were returned and replacements (perhaps the same units) were sent
...
30 x $300 = 810
+
3 units P2A2 x
...
50 = 281
...
25
Net Sales:
Net Sales is the total sales revenue less the reprocessing costs
...
75 (Sales Revenue) - $1091
...
5
Cost of Goods Sold:
Cost of Goods Sold is the weighted average cost of finished goods from previous
quarters and the cost of goods purchased this quarter, times the number of units sold
...
Multiply the number of units of each product sold in
each area by:
If finished goods inventory were on hand then use Unit Inventory Cost from last
quarter's production statement;
If no finished goods were available or you ran out, then multiply the remaining units
sold by the cost of the goods you bought through contracts
...
A1P1: 313 x $ 80 = $25,040
+
A2P1: 387 x $ 80 = $30,960
+
A1P2: 1,516 x $115 = $174,340
+
A2P2: 2,000 x $115 = $230,000
Cost Of Goods Sold = $460,340
Advertising:
Advertising is a budgeted decision made by the team
...
Quality Control:
122
Appendix B – Report Analysis
Quality Control is a budgeted decision used to reduce returns and improve product
quality image
...
Bad Debts:
Bad Debts are mainly a function of the credit policy selected by the firm and the
amount of sales
...
The tighter your firm's credit policy, the fewer bad debts and the fewer units sold
...
In our example firm 11 had a credit policy of 2
...
Sales Expense:
Sales Expense is the total of commissions paid out to reps for each unit of product
sold (including backorders) and salaries paid to sales representatives
...
NAFTA and EU area sales reps are both
earning a salary of $4,000 per quarter as are EU sales reps, regardless of sales volume
...
All salaries and commissions are in U
...
dollars so there is no need to convert
...
00 commission x 313 units = $626
+
P1A2: $2
...
00 commission x 1,516 = $4,548
+
P2A2: $3
...
Sales expense
might be lower since sales lost by a competitor by random luck could become your sale
...
Management is advised to calculate
sales expenses and match it against actual sales expense as report on the income
statement at least twice a year
...
Inventory/Shipping Charges:
123
Appendix B – Report Analysis
The Inventory/Shipping Charges is composed of two types of expenses:
Inventory Carrying Cost
Shipping Expense
At the end of the quarter, the product your firm was not able to sell is warehoused at
a commercial warehouse
...
Within the Scent Industry, each product type has a per unit storage
cost
...
60 cents per quarter
Inventory Carrying Cost Per unit of Product 2 is
...
1,300 units of P1 x $
...
90 = 435
...
60
If Firm 11 had shipped product from one area to another they would have incurred a
charge for each unit of product they shipped
...
Interest Expense:
If your firm issued bonds, term loans, or if a special loan was provided automatically
due to lack of cash, your firm will have incurred an interest expense
...
Interest on Short Term Loan: interest is not due until the following quarter
...
Multiply
the loan amount by 1/4 of your firm's annual unique short-term rate reported on the form
along with credit rating
...
Interest on Term Loan: multiply the dollar amount of the loan by 3% (12% divided
by 4 quarters)
...
Interest on Bonds: this is the interest money you pay on the bonds
...
5% (10% annually divided by 4 quarters)
...
Amortized Bond Discount: amortized bond discounts are included in the interest
expense
...
5
...
This special loan is difficult to trace in your financial statements but it can be a
major cost
...
When you order product from a manufacturer
through contracts, the simulation automatically and immediately checks your
124
Appendix B – Report Analysis
cash balance on your previous balance sheet
...
The program then collects cash back as you sell your product
throughout the quarter
...
The loan will not appear on the balance sheet as a liability since
it was taken out and paid back in the same quarter
...
Check the cash flow report to see if this happened to your firm
...
After the first
quarter, always plan to end up with enough cash to pay for contract purchases
coming up the following quarter
...
The simulation makes the product purchase before any quarterly decisions are
considered such as the issuing of Stocks or Bonds
...
Your result will be similar on your very first decision set
...
This loan is the result of running short of cash by the end of the quarter
...
The loan cost is 36% annual,
9% per quarter
...
Take
9% of that loan as interest in the current quarter
...
They are repaid automatically each quarter
...
account on the income statement is composed of the following:
1
...
Hiring Trainees = $3,000 x each trainee hired
3
...
Transferring Sales Reps = $3,000 for each sales rep that is transferred to a new area
5
...
Contract to sell finished goods to another simulation team = 6% of the sale value
...
$12,000 x 4 new Sales Reps hired = $48,000
+
$3,000 x 6 new Trainees hired = $18,000
125
Appendix B – Report Analysis
Total Miscellaneous = $66,000
Income Taxes:
Income Taxes are paid quarterly at the rate of 22% on the first $6,250 earned and
48% on the balance of earnings
...
If
you paid taxes and then have a loss, a tax rebate will be provided and shown as a negative
tax (-)
...
The 48% tax rate reflects U
...
federal, state and local income taxes, plus other
miscellaneous taxes
...
$6,250 x
...
48 = 210,965
...
76
Association Global View
Balance Sheet - Firm 11
Assets
Cash
Accounts Receivable
Marketable Securities
Inventories:
Finished Goods
Raw Materials
Total Inventories
Manufacturing Plants
Plant and Equip
...
Depr
...
Disc
Retained Earnings
Total Equity
1818921
Liabilities&Equity
17500
0
0
0
0
17500
400000
1168000
0
233421
1801421
1818921
Balance Sheet
The stock sale for firm 11 was recorded as $400,000 shares sold with $1 of the sale
recorded as "Common Stock" ($400,000) and the balance as "Other Paid In" ($1,168,000)
...
92 per share equals $1,568,000
...
A balance sheet provides the starting point for the next period
(quarter in the simulation)
...
When
the quarter is finished, a new balance sheet is prepared
...
To aid
management and investors, the income statement is prepared which summarizes all the
changes between the two balance sheets that relate to business operations
...
The income statement does not consider cash flows
...
For example, spending cash to
buy finished goods is a major balance sheet change
...
The income statement only reflects finished goods as a cost when those goods
are sold as part of the operations of the firm
...
That meant the real assets (shown on the left hand side of the balance
sheet) increased because of management's operation of the firm
...
To make the balance sheet balance,
the right side of the balance sheet must to reflect the increase in assets due to operations
(called profits)
...
Notice that the retained earnings account (shown on the balance sheet) is exactly
the same as the net income (shown on the income statement)
...
If the firm looses assets
next quarter (loss on the income statement), the retained earnings will be written down by
that amount
...
Firm 11's opening quarter profit will make stockholders very happy, which is
reflected in the ending stock price being higher than the IPO price
...
Changes in stock prices do not affect the firm or its
balance sheet
...
The firm is no longer involved
...
Cash Flow Report
The income statement does not provide enough information to determine how much
cash came in and how much cash went out over a quarter
...
A cash sale and a credit sale are the same
127
Appendix B – Report Analysis
thing as shown on the income statement
...
The Cash Flow Report gives a more
precise breakdown of cash inflows and disbursements over the quarter
...
These are the longer-term
accounts that would affect cash if they increased or decreased
...
Part 2 of the report is "Beginning Cash Balance" taken last quarter's balance sheet
less any purchases of finished goods through contracts plus the addition of $10,000 extra
cash over the purchase of finished goods if a temporary special loan was required
...
Part 3 of the report shows all cash inflows on the left side and all cash outflows for
the quarter on the right side
...
It
would be nice if they were exactly the same
...
85
Net Cash Sales
712565
Investment Income
0
...
85
Income from Subsidiary
0
...
00
Advertising Expense
Receivables Factored
0
...
00
New Short Term Loan
0
...
00
Sales Expense
New Bond Less Discount
0
...
65
New Stock Issue
1568000
Inventory/Shipping costs
Maintenance Expense
Cash Available for Operations
2290565
Interest Expense
Factoring Expense
Miscellaneous Expense
Income Tax
Beginning Short Term Loan
Beginning Special Loan
Prepay Bonds
Repurchase Common Shares
Cash Dividends Paid
Raw Mtls Futures *
...
Computed minus Actual Bal
...
0
...
00
2162
40000
36000
0
...
00
27948
32500
1216
0
...
00
66000
212341
0
...
00
0
...
00
0
...
00
1104867
1185699
The cash flow report shows you where your cash came from and where it went
during the quarter
...
For example, you may have
$50000 worth of sales on your income statement but only $30,000 as net sales on your cash
flow report (60% of sales become cash immediately; the remainder will come in next
quarter)
...
"Cash Available for Operations" is an important number that shows the amount of
cash the firm had to work with for the quarter
...
"Total Cash Disbursements" lists cash payments during the quarter
...
129
Appendix B – Report Analysis
"Computed Minus Actual Balance" is a test to see if the cash flow reporting
system is in error or if an accounting error was made in the firm
...
8% accurate
...
What is taking place is
a cash flow program is attempting to document the real cash flow in the firm
...
One quarter your
firm's accounting program will use 30% of executive salaries as carried over to the next
quarter in accounts payable
...
2%
...
We recommend you overlook differences in
computed minus actual balances that fall below $1,000
...
Contact your Global View tutor or mentor
immediately
...
The auditors are not employees of the firm but rather trusted external
accounting firms
...
Tracing cash flows through this small simulated firm is
a difficult process
...
If you like working with numbers and
accounts such as this, consider a career in accounting or special areas of finance and law
such as Certified Financial Planner or a tax attorney
...
It could be that you had no loan on your balance sheet last quarter and
no special loan on your balance sheet this quarter, yet you show a large beginning special
loan in the cash flow report
...
This will certainly be true in your
very first set of decisions
...
The beginning special loan, in this case, only appears on the
cash flow report
...
Confidential Firm Reports
The confidential reports for firms 12, 13, 14, 15, 16 and 17 are presented for your
review in this section
...
The firms represent a variety of visions and related strategies
...
A serious review of the two firms will
produce guidelines that team members can debate and hone until your unique vision,
strategy and objectives are ready to implement into decisions
...
Firm 17 hired 20 sales representatives at a onetime cost of $240,000
...
The initial expense was very high but it
will not occur in the following quarter
...
Firm 11 enjoyed a good position in the market
...
It is easier for middle-sized firms to move up scale rather than down
scale to compete with firms such as Firm 17
...
Analyze your competitor's moves in the trial runs
...
Analyze the following confidential firm reports
so you know what to expect on the first run across a wide range of strategies
...
703
6
...
69
Sales and Marketing Report
Total Unit Sales
Wholesale Orders
Backorders
Returns
Sales Lost
Sales Reps
Base Salary
Sales Commissions
Product Prices
Market Share:
Advertising Budget
Area 1
Product 1 Product 2
439
1516
0
0
0
0
2
0
0
0
3
3000
2
...
50
160
...
00
7
...
0%
12000
12000
Area 2
Product 1
Product 2
442
1736
0
0
0
0
0
8
0
0
3
3000
2
...
50
160
...
00
8
...
0%
12000
12000
Production Report
Area 1
Area 2
Product
1
Finished Goods Inventory
Inventory Unit Cost
Product
2
Product
1
Product
2
561
484
558
264
80
115
80
115
132
Appendix B – Report Analysis
Firm Reports for Firm 12 (continued)
Income Statement
Revenue
Sales Revenue
Less: Processing Costs
Net Sales
Investment Income 0:000
Marketable Securities
Income Before Taxes
Net Income
Expenses
$1141208
$846
$1140362
$0
$0
Cost of Goods Sold
Advertising
Quality Control
Bad Debts
Product Improvement
Engineering Studies
Sales Expense
Administrative Expense
Invt/Shipping Charges
Maintenance
Depreciation
Interest Expense
Factor Cost
Miscellaneous Expense
$ 357050 Income Taxes
$ 187291
$444460
$48000
$36000
$2578
$0
$0
$28290
$50000
$1345
$0
$0
$82640
$0
$90000
$ 169759
Balance Sheet
Assets
Cash
Accounts Receivable
Marketable Securities
Inventories:
Finished Goods
Raw Materials
Total Inventories
Manufacturing Plants
Plant and Equip
...
Depr
...
Disc
Retained Earnings
Total Equity
2488930 Liabilities&Equity
133
17500
0
0
0
1000000
1017500
300000
1002000
-17862
187291
1471429
2488930
Appendix B – Report Analysis
Firm Reports for Firm 12 (continued)
Cash Flow Report
Changes in Capital Accounts
Account
Last Qtr
This Qtr
Change
Bonds
0
1000000
1000000
Shares
0
300000
300000
Other Paid in Capital
0
1002000
1002000
Unamortized Disct
0
-17862
17862
Retained Earnings
0
187291
187291
Equity
0
1471429
1471429
Beginning Cash Balance =10,000
Cash Inflows
Cash Disbursements
Raw Mtls at Market *
...
00
Mfg Labor Costs *
...
00
Bad Debts Expense
Collection of Receivables
0
...
00
Quality Control Expense
Product Improvement
New Special Loan
0
...
00
Engineering Studies
Change in Term Loan
0
...
65
New Stock Issue
1302000
Inventory/Shipping costs
Maintenance Expense
Cash Available for Operations 2977019
Interest Expense
Factoring Expense
Miscellaneous Expense
Income Tax
Beginning Short Term Loan
Beginning Special Loan
Prepay Bonds
Repurchase Common Shares
Cash Dividends Paid
Raw Mtls Futures *
...
Computed minus Actual Bal
...
0
...
00
2578
48000
36000
0
...
00
28290
32500
1345
0
...
00
90000
169759
0
...
00
0
...
00
0
...
00
1120171
1856849
Appendix B – Report Analysis
Firm Reports for Firm 13
Credit Report
Credit Rating
Short Term Rate
Debt to Equity Ratio
1
...
669
0
...
75
1
...
0%
6
...
75
1
...
0%
7
...
-Accum
...
Net Plant
Total Assets
1765070
0
0
0
Liabilities
331802 Accounts Payable
535215 Special Loan
0 Short Term Loan
Term Loan
Bonds
Total Liabilities
1765070
Equity
Common Stock
Other Paid In
0 Unamort
...
85
Net Cash Sales
804495
Investment Income
0
...
85
Income from Subsidiary
0
...
00
Advertising Expense
Receivables Factored
0
...
00
New Short Term Loan
0
...
00
Sales Expense
New Bond Less Discount
0
...
65
New Stock Issue
2660000
Inventory/Shipping costs
Maintenance Expense
Cash Available for Operations
3474496
Interest Expense
Factoring Expense
Miscellaneous Expense
Income Tax
Beginning Short Term Loan
Beginning Special Loan
Prepay Bonds
Repurchase Common Shares
Cash Dividends Paid
Raw Mtls Futures *
...
Computed minus Actual Bal
...
0
...
00
3488
60000
97500
0
...
00
33300
32500
13655
0
...
00
150000
0
...
00
2525000
0
...
00
0
...
00
0
...
498
6
...
95
Sales and Marketing Report
Total Unit Sales
Wholesale Orders
Backorders
Returns
Sales Lost
Sales Reps
Base Salary
Sales Commissions
Product Prices
Market Share:
Advertising Budget
Area 1
Product 1 Product 2
627
1819
0
0
0
0
2
13
0
0
6
2000
1
...
75
135
185
10
...
0%
15000
15000
Area 2
Product 1
Product 2
497
3468
0
0
0
0
0
12
0
0
6
2000
1
...
75
135
185
9
...
0%
15000
15000
Production Report
Area 1
Area 2
Product
1
Finished Goods Inventory
Inventory Unit Cost
Product
2
Product
1
Product
2
2373
5181
1503
2532
80
115
80
115
138
Appendix B – Report Analysis
Firm Reports for Firm 14 (continued)
Income Statement
Revenue
Sales Revenue
Less: Processing Costs
Net Sales
Investment Income 0:000
Marketable Securities
Income Before Taxes
Net Income
Expenses
$1159371
$1496
$1157875
$0
$0
Cost of Goods Sold
Advertising
Quality Control
Bad Debts
Product Improvement
Engineering Studies
Sales Expense
Administrative Expense
Invt/Shipping Charges
Maintenance
Depreciation
Interest Expense
Factor Cost
Miscellaneous Expense
$ -117535 Income Taxes
$ -117535
$697925
$60000
$49000
$3443
$0
$0
$34886
$50000
$9267
$0
$0
$202890
$0
$168000
$0
Balance Sheet
Assets
Cash
Accounts Receivable
Marketable Securities
Inventories:
Finished Goods
Raw Materials
Total Inventories
Manufacturing Plants
Plant and Equip
...
Depr
...
Disc
Retained Earnings
Total Equity
2496611 Liabilities&Equity
139
17500
0
0
0
1200000
1217500
400000
1024000
-27354
-117535
1279111
2496611
Appendix B – Report Analysis
Firm Reports for Firm 14 (continued)
Cash Flow Report
Changes in Capital Accounts
Account
Last Qtr
This Qtr
Change
Bonds
0
1200000
1200000
Shares
0
400000
400000
Other Paid in Capital
0
1024000
1024000
Unamortized Disct
0
-27354
27354
Retained Earnings
0
-117535
-117535
Equity
0
1279111
1279111
Beginning Cash Balance =10,000
Cash Inflows
Cash Disbursements
Raw Mtls at Market *
...
00
Mfg Labor Costs *
...
00
Bad Debts Expense
Collection of Receivables
0
...
00
Quality Control Expense
Product Improvement
New Special Loan
0
...
00
Engineering Studies
Change in Term Loan
0
...
65
New Stock Issue
1424000
Inventory/Shipping costs
Maintenance Expense
Cash Available for Operations
3298860
Interest Expense
Factoring Expense
Miscellaneous Expense
Income Tax
Beginning Short Term Loan
Beginning Special Loan
Prepay Bonds
Repurchase Common Shares
Cash Dividends Paid
Raw Mtls Futures *
...
Computed minus Actual Bal
...
0
...
00
3443
60000
49000
0
...
00
34886
32500
9267
0
...
00
168000
0
...
00
1905000
0
...
00
0
...
00
0
...
596
6
...
84
Sales and Marketing Report
Total Unit Sales
Wholesale Orders
Backorders
Returns
Sales Lost
Sales Reps
Base Salary
Sales Commissions
Product Prices
Market Share:
Advertising Budget
Area 1
Product 1 Product 2
877
5759
0
0
0
0
6
0
0
0
7
2000
1
...
75
130
165
%
%
25000
25000
Area 2
Product 1
Product 2
718
9000
0
0
0
8
1
0
0
161
7
2000
1
...
75
130
165
%
%
25000
25000
Production Report
Area 1
Area 2
Product
1
Finished Goods Inventory
Inventory Unit Cost
Product
2
Product
1
Product
2
2873
3241
2282
0
80
115
80
115
141
Appendix B – Report Analysis
Firm Reports for Firm 15 (continued)
Income Statement
Revenue
Sales Revenue
Less: Processing Costs
Net Sales
Investment Income 0:000
Marketable Securities
Income Before Taxes
Net Income
Expenses
$2708397
$275
$2708122
$0
$0
Cost of Goods Sold
Advertising
Quality Control
Bad Debts
Product Improvement
Engineering Studies
Sales Expense
Administrative Expense
Invt/Shipping Charges
Maintenance
Depreciation
Interest Expense
Factor Cost
Miscellaneous Expense
$ 142323 Income Taxes
$ 75633
$1824885
$100000
$46125
$9690
$0
$0
$55902
$50000
$6010
$0
$0
$275187
$0
$198000
$ 66690
Balance Sheet
Assets
Cash
Accounts Receivable
Marketable Securities
Inventories:
Finished Goods
Raw Materials
Total Inventories
Manufacturing Plants
Plant and Equip
...
Depr
...
Disc
Retained Earnings
Total Equity
3307280 Liabilities&Equity
142
17500
0
0
0
1500000
1517500
500000
1250000
-35853
75633
1789780
3307280
Appendix B – Report Analysis
Firm Reports for Firm 15 (continued)
Cash Flow Report
Changes in Capital Accounts
Account
Last Qtr
This Qtr
Change
Bonds
0
1500000
1500000
Shares
0
500000
500000
Other Paid in Capital
0
1250000
1250000
Unamortized Disct
0
-35853
35853
Retained Earnings
0
75633
75633
Equity
0
1789780
1789780
Beginning Cash Balance =10,000
Cash Inflows
Cash Disbursements
Raw Mtls at Market *
...
00
Mfg Labor Costs *
...
00
Bad Debts Expense
Collection of Receivables
0
...
00
Quality Control Expense
Product Improvement
New Special Loan
0
...
00
Engineering Studies
Change in Term Loan
0
...
65
New Stock Issue
1750000
Inventory/Shipping costs
Maintenance Expense
Cash Available for Operations
4847112
Interest Expense
Factoring Expense
Miscellaneous Expense
Income Tax
Beginning Short Term Loan
Beginning Special Loan
Prepay Bonds
Repurchase Common Shares
Cash Dividends Paid
Raw Mtls Futures *
...
Computed minus Actual Bal
...
0
...
00
9690
100000
46125
0
...
00
55902
32500
6010
0
...
00
198000
66690
0
...
00
0
...
00
0
...
00
3408217
1438895
Appendix B – Report Analysis
Firm Reports for Firm 16
Credit Report
Credit Rating
Short Term Rate
Debt to Equity Ratio
1
...
592
0
...
50
2
...
00
140
...
0%
30
...
50
2
...
00
140
...
0%
30
...
-Accum
...
Net Plant
Total Assets
2416775
0
0
0
Liabilities
349475 Accounts Payable
1660049 Special Loan
0 Short Term Loan
Term Loan
Bonds
Total Liabilities
2416775
Equity
Common Stock
Other Paid In
0 Unamort
...
85
Net Cash Sales
2496464
Investment Income
0
...
85
Income from Subsidiary
0
...
00
Advertising Expense
Receivables Factored
0
...
00
New Short Term Loan
0
...
00
Sales Expense
New Bond Less Discount
0
...
65
New Stock Issue
4680000
Inventory/Shipping costs
Maintenance Expense
Cash Available for Operations
7186464
Interest Expense
Factoring Expense
Miscellaneous Expense
Income Tax
Beginning Short Term Loan
Beginning Special Loan
Prepay Bonds
Repurchase Common Shares
Cash Dividends Paid
Raw Mtls Futures *
...
Computed minus Actual Bal
...
0
...
00
13534
160000
53500
0
...
00
86721
32500
18634
0
...
00
270000
0
...
00
5690000
0
...
00
0
...
00
0
...
00
7
...
636
Sales and Marketing Report
Total Unit Sales
Wholesale Orders
Backorders
Returns
Sales Lost
Sales Reps
Base Salary
Sales Commissions
Product Prices
Market Share:
Advertising Budget
Area 1
Product 1 Product 2
2130
9093
0
0
0
0
11
57
0
0
10
1200
1
...
75
120
135
34
...
0%
50000
50000
Area 2
Product 1
Product 2
1658
19669
0
0
0
0
9
53
0
0
10
1200
1
...
75
120
135
30
...
0%
50000
50000
Production Report
Area 1
Area 2
Product
1
Finished Goods Inventory
Inventory Unit Cost
Product
2
Product
1
Product
2
6870
15907
7342
5331
80
115
80
115
147
Appendix B – Report Analysis
Firm Reports for Firm 17 (continued)
Income Statement
Revenue
Sales Revenue
Less: Processing Costs
Net Sales
Investment Income 0:000
Marketable Securities
Income Before Taxes
Net Income
Expenses
$4456457
$5278
$4451179
$0
$0
Cost of Goods Sold
Advertising
Quality Control
Bad Debts
Product Improvement
Engineering Studies
Sales Expense
Administrative Expense
Invt/Shipping Charges
Maintenance
Depreciation
Interest Expense
Factor Cost
Miscellaneous Expense
$ -598403 Income Taxes
$ -598403
$3610670
$200000
$68000
$14163
$0
$0
$79694
$50000
$27641
$0
$0
$714414
$0
$285000
$0
Balance Sheet
Assets
Cash
Accounts Receivable
Marketable Securities
Inventories:
Finished Goods
Raw Materials
Total Inventories
Manufacturing Plants
Plant and Equip
...
Depr
...
Disc
Retained Earnings
Total Equity
5369159 Liabilities&Equity
148
17500
814432
0
0
2500000
3331932
1000000
1710000
-74370
-598403
2037227
5369159
Appendix B – Report Analysis
Firm Reports for Firm 17 (continued)
Cash Flow Report
Changes in Capital Accounts
Account
Last Qtr
This Qtr
Change
Bonds
0
2500000
2500000
Shares
0
1000000
1000000
Other Paid in Capital
0
1710000
1710000
Unamortized Disct
0
-74370
74370
Retained Earnings
0
-598403
-598403
Equity
0
2037227
2037227
Beginning Cash Balance =10,000
Cash Inflows
Cash Disbursements
Raw Mtls at Market *
...
00
Mfg Labor Costs *
...
00
Bad Debts Expense
Collection of Receivables
0
...
00
Quality Control Expense
Product Improvement
New Special Loan
814432
New Short Term Loan
0
...
00
Sales Expense
New Bond Less Discount
2421716
Administrative Expense
*
...
70
New Construction
Total Cash Disbursements
Computed Ending Cash Bal
...
9999
-1
149
Quarterly Stmt Cash Bal
...
00
0
...
00
0
...
00
710500
0
...
00
0
...
00
0
...
00
0
...
00
8617498
10000
Chapter 7
Finance
This chapter will guide your team through the concepts of finance
...
Based on these perspectives, you will
come to understand the financial decisions that need to be made and the
reasoning behind them
...
In the United States, individual States
have the right to charter a corporation
...
Raising money for a new firm can be more difficult than creating a vision
statement, completing product development or marketing
...
Management of many start-up ventures, desperate to sell stock to
anyone, seek out relatives, friends, and business associates as potential shareholders
...
Often State laws limit the number of
shareholders to a small number, such as twenty
...
It is rare that the executive team would have the talent,
knowledge and experience needed to raise capital for a new venture
...
The specialists are known as venture
capitalists
...
Venture capitalists will purchase stock if the analysis of the business plan
indicates:
Great potential in terms of returns in the longer run to stockholders
...
Initial funding is sufficient or will last until cash flows from sales can power future
growth
...
Competition is under control due to the firm's patents, copyrights, or longer term
differentiated advantage
...
The capitalists supply only a portion of the capital needed in exchange for stock
and perhaps loans that can be converted into stock at a later date
...
They prefer management also
have some financial stake in the firm
...
They do however, provide the needed capital for new businesses and can also
supply good consulting advice
...
This market is the sale of
stock to the general public
...
You must target wealthier upscale buyers
...
Investment bankers specialize in selling
a firm's new issue of stock or bonds to both the general public and private parties
...
Your Firm's Investment Banker and Your IPO
The simulation has an investment banker module built into the program
...
The investment banker module then issues the IPO shares to the simulated
market of stock buyers
...
In the simulation, the guarantee is that all shares will sell, but the price is on a
best efforts basis
...
In real life it depends on the investment banker
selected, the amount of promotion the banker did prior to the IPO, and the luck of finding
the right investors at the right time
...
50 or more even when two firms look exactly alike (size of issue and amount of debt
issued in the same quarter)
...
Generally, the lender will require a fee and/or interest charge for the use of the funds
...
Debt is frowned on in some societies and embraced in others
...
Many of the classic movies have “the evil bank” as the villain coming to
take possession of the cattle ranch, the dust bowl farm, or the family business
...
Good economic times, especially if fueled by rising prices (inflation), make the
smart users of debt far richer than the individuals or businesses that utilize only their own
money (equity)
...
You would, over
the twenty years, have earned considerable tax advantages in using debt since interest
152
Chapter 7 -- Finance
from home loans can be deducted from your earnings before your income tax is
calculated
...
The house after twenty years is 100% yours
...
Debt allows you to make larger purchases that could not be
made if you used only your own money
...
What happens if prices go up each year for the next twenty years after you
purchase the home? In twenty years, the value of the home might well be $500,000
...
Not only will you have paid off the loan after twenty years, you will also have gained the
entire increase in value
...
This story has been true for most middle to late age homeowners
...
That value, net (minus) the loan is called owner’s
equity
...
Sometimes, when the economy is not good and individuals lose their jobs, there
are not enough homebuyers for the number of homes on the market
...
Basic economics would suggest that when supply is greater
than demand the supply will be reduced and/or the price will be reduced
...
Since supply is somewhat fixed in the short run,
house prices could decline sharply due to poor economic conditions
...
In the longer run, the supply of homes will stop
increasing once builders finish their construction projects
...
In products with a
long lead time from start to sale, economic forecasting is essential
...
The same problem exists for those individuals who own a home with a large loan
...
The promissory note is the borrower's promise to repay the debt as required
...
The pledge of the
home as security to the promissory note is called a mortgage
...
And
what will “repo” man do with the repossessed property? Financial institutions do not
want the property back
...
Taking
over property creates a bad public image for the bank
...
However, having the
house is better than having a loan that produces no return at all
...
You
have two major sources of funds
...
The equity funds that come back from the sale of stock are locked
permanently into the corporation
...
You simply need to inform them about what
the corporation is doing
...
However, investors generally do
not fight
...
Equity funds are very risk free from the
corporation's point of view
...
For firms in highrisk industries, such as bio-technology, financing with stock is the way to go
...
High risk debt financing is not recommend for firms with high
business risk
...
Your second major choice of funding is debt
...
It is not unusual for stockholders in new firms to expect a 20% or more
return per year
...
Just like our discussion about borrowing to purchase a home, corporations
borrow to purchase manufacturing plants and office buildings
...
Lenders carry less risk than stockholders because they have a contract stating
exactly when interest is due and when the principal must be repaid
...
For a new firm with promise,
experienced management and enough stockholder backing, lenders might provide limited
amounts of capital expecting about an 8% to 12% annual return (compared to 20+% for
stockholders that purchased a firm’s IPO)
...
S
...
Governments deny the
same tax deduction when payments of earnings are made to stockholders in the form of
dividends
...
Assume a corporation pays 42% in combined local, state and
federal income taxes
...
In this case the debt-holder money cost drops sharply from 12% on an after tax
basis
...
42 in taxes
...
42
$1 income
$
...
50 profit = $
...
21 cents in taxes only because it was funded partly
by debt
...
Debt
can shield a firm from paying taxes and thus the real after tax cost of debt is lower than
the stated interest charged, depending on the tax rate paid by the firm
...
The 12% needs to be
restated to its after tax cost which is 6
...
The Question
In your firm, would you rather have a stable and conservative source of funding
from stock? Or, would you rather mix that funding with some debt?
Using debt will obligate the firm to make payments and thus increase its risk
...
Using debt in this way means you need fewer shares of stock
and, if you are successful, each share will then have higher earnings per share
...
43 EPS
EPS is the major driver of share price
...
43 will be much higher than the stock in the first example, which had $1 EPS
...
$0 income
500,000 shares outstanding
$0/500,000 = $0 EPS
- $120,000 due to interest expense (tax carry forwards or backwards not considered)
300,000 shares outstanding
-$120,000/300,000 shares = -$
...
43 to -$
...
The more conservatively financed firm (all stock, no debt)
will also decline in price since its EPS went from $1 to $0, but its fall will not be as
drastic as the firm that financed with debt and equity
...
High-risk production, combined with high-risk markets, combined with high risk
financing creates the most volatile stock in the market
...
As long
as the car factory was near capacity the cost per car would be low
...
Given high
revenues and low costs, profits would be very high
...
But only in the best of times!
Type of Debt
There are three major types of debt used to finance firms
...
If you hire someone and
salaries are paid monthly, then by the time the month is halfway through you have
created a debt for the service they provided
...
You
now have a debt but all you signed was the purchase order
...
Accounts payable represent very short-term debt that is payable in a few days to a few
months
...
The second type of debt is categorized as loans
...
The terms of the note may vary in order to match the
needs of the lender and buyer
...
Loans are generally longer term than debt owed in the accounts payable category
...
Long-term loans may require monthly, quarterly, semi-annual or annual
payments along with interest due
...
The bonds are
promissory notes and the firm must pay interest and eventually repay the bond principal
...
Bonds are sold in
smaller denominations generally at $1,000 each
...
This is in contrast to loans, which are very large and made in agreement with
large lenders such as banks and insurance companies
...
Therefore the firm appoints a
well-known and respected financial institution to help define the terms of the bond and to
act on behalf of the bondholders (the investors) over the life of the bonds
...
If the firm is well known and it appears that it can honor the bond contract the
bonds should sell well
...
The interest rate was set is too low compared to what is available from other
bonds in the market
...
The firm has a poor record of earnings or its position in the market is not stable
...
The firm is attempting to fund its operation with excessive debt in comparison to
a small amount of equity
...
If the bond is not attractive to investors not all the
bonds will sell and they may sell at a discount
...
Since it would take weeks or months to
rewrite the contract and promote the sale, the firm will simply lower the price (take a
discount) on the $1,000 bonds
...
With a
bond discount the firm will mark the $1,000 face value (original stated value) down to a
price that will sell well to investors
...
All other contract terms
including interest stay the same
...
)
Financial Assessments
Financial assessment measures management's performance against external
benchmarks
...
In this section we examine the variables often used when
157
Chapter 7 -- Finance
measuring financial performance followed by methods to evaluate financial performance
...
This statement is generally used in discussions concerning the time value of money
...
If you can inherit it, earn it, marry into it, or steal it you
can unlock that value so that goods and services are at your command
...
How much value you can create
depends on the return and the length of time the funds are invested
...
Assume it is through a retirement account so taxes on profits
each year are not considered
...
1 year = $ 1,080
2
...
10 years = $ 2,159
4
...
40 years = $21,725
In this set of time related investments, it is clear that time is money
...
Cash-In-Hand
Increasing profits after tax will delight stockholders
...
Cash for stockholders can only come from
two sources:
1
...
Cash dividends paid directly from the firm on each share of stock outstanding
...
158
Chapter 7 -- Finance
When firms assess financial performance of a new machine or a new product line,
profits are examined
...
As we pointed
out in the section on time above, time = money
...
But if one machine
produced cash flows earlier than the other machine (still with equal profits), it would
come out the winner
...
EPS (earnings per share) for any one firm
and the stock market in general may be quite volatile
...
The point is that returns can vary from the expected
...
Then
estimate the low, high, and average (or most likely) return from an investment
...
The range between high and low estimates will help you
identify risk levels (discussed next)
...
Risk
Risk to a professor of finance is any change from the expected result
...
We will use the more common expression of risk in this discussion, that is the
chance of receiving less than expected
...
Note that we are not talking about why the range
exists or why an investment is volatile
...
Examples for volatility in
returns are competition, erratic decision-making, and external forces such as legal
constraints imposed by governments
...
The expected return is
guaranteed and unless your bank or the United States government fails, the expected
return should turn out to be the same as the actual return
...
You will have taken a real
economic loss even if your income records show a profit
...
At some level avoiding risk might become
unprofitable
...
Assume your tax rate on this income is 20%
159
Chapter 7 -- Finance
Tax on profit is
...
03) = $
...
6 = $2
...
2% you lost $3
...
While on paper you are now worth $100 + $2
...
40 in terms
of what you can now buy, your wealth at the end of the year is equal to 102
...
20
= $99
...
Given this example, the most risk free investment (little risk because the expected
return was guaranteed) turns out to be a loss
...
Financial Assessment Methods
There are several methods for evaluating financial performance
...
The four basic questions are:
1
...
3
...
How long before I can get my money back?
How much value will I have in X periods?
How much is the investment presently worth?
What return will I make?
Payback method is used to answer question 1
...
Present value method is used to answer question 3
...
All four financial assessment methods use only cash for calculations
...
Even if
profits over the longer run are equal between the investments, early cash flows are
important --- time = money --- get your cash sooner than later so you can invest in other
ventures
...
Only investors that worry a lot
about the money they invested use it
...
No one likes to admit to a financial failure
...
Thus, while the method is not a good
method on which to make decisions, many investors still calculate payback to calm their
anxiety
...
Firm A estimated the following profits and cash
flows over the life of the machine:
Year 1 = $150,000 profit with 100,000 being available in cash
Year 2 = $450,000 profit with 200,000 being available in cash
Year 3 = $600,000 profit with 400,000 being available in cash
Year 4 = $600,000 profit with 500,000 being available in cash
Year 5 - 10 = 600,000 profit with 500,000 being available in cash (per year)
By the end of Year 3 profits equaled the $1,200,000 cost of the machine
...
Therefore, payback in this example is 4 years found by adding the cash
flows from years 1 through 4 to equal $1,200,000
...
Future Value; Present Value; Rate of Return
These three methods for financial analysis or assessment all use the same three
variables
...
for each period
...
Assume you put $1 (value) into a special savings
account at the beginning of Year 1 that earns 5% (rate) each period (one year in this
case)
...
Years 1 and 3 have been filled in for you to ensure that your calculations
are correct
...
00
1
...
1576
?
Congratulations, you have just moved money through time (called
compounding)
...
How can you mathematically move
money back through time? In the future value example above you moved money forward
each period by multiplying the value by 1+ the rate: value X (1 + rate)
...
Rate of
Return 5%
Present
Time
?
Present Value
Year 1
Year 2
Year 3
Year 4
Year 5
$1
...
Next complete the rate of return table below
...
You
can elect to move in either direction
...
If you guessed at the correct rate, the present value
compounded over the number of periods will equal the future value
...
You can also elect to start at
Year 5 in this example and discount (or move the money back through time) at your
guessed rate
...
The
future and present values in the table are given
...
You cannot change the values
...
00
Rate of Return
Year 1 Year 2
Year 3
Year 4
Year 5
$1
...
The most common is what happens if I invest a dollar in Period 0 and also invest a dollar
in each subsequent Period? Fortunately calculators and computers can handle almost all
such variations
...
Let us try several questions to gain some experience in
selecting the right method
...
I need $1,000 in 5 years
...
Use the Future Value Method
B
...
Use the Rate of Return Method
Hint: First consider what is known in the problem
...
You know the rate is 5%
...
Solve the problem stated in question 1 above
...
$1,000
162
Chapter 7 -- Finance
B
...
$ 1,276
D
...
Estimating the answer should provide you with the right answer in this problem without
doing any calculations
...
It insures
that you are moving money through time in the right direction
...
Before we proceed to the next questions, review the small section of a future
value and a present value table shown
...
The present value
table starts with a $1 future value and discounts it back to the present time (values start a
$1 and become smaller)
...
Examine the tables below
...
7835
...
783
...
7835 or
$783
...
The tables make it so easy
...
05
1
...
1025
1
...
1576
1
...
2155
1
...
2763
1
...
9524
...
9070
...
8638
...
8227
...
7835
...
One share of a popular tech stock is presently trading at $112
...
How much will it be worth
in five years?
A
...
$1
...
$180
D
...
54
Hint: First you should estimate the answer
...
Thus the answer must be
larger than $112
...
Moving from today (present value) with $1
compounding at 10% the future value would be 1
...
That is $1 will have grown to
$1
...
Thus, $112 would have grown to $112 X 1
...
163
Chapter 7 -- Finance
4
...
He/She requires a 10% return for that type of risk
...
$112
B
...
$124
D
...
$1 future value moved back 5 periods at 10% to the present is worth
$
...
$200 moved back in this problem would be worth $200 X
...
5
...
The investor in problem 4 researched the company and
made an independent decision about its expected year 5 value
...
Should
the investor in Problem 4 purchase the stock if the current market value is $112?
A
...
No
C
...
Since the stock is being sold at $112, the answer
is, yes the investor should purchase the stock
...
In this case, $124 $112 = $12 above expectations or $12 above value using the required 10% return
...
The Present Value Concept Applied in the Simulation for Assessment
Purposes
The same NPV system discussed is used in the simulation to rank your firm's
financial performance
...
If your team can make the stock rise by 5% per quarter you will have
made the exact return stockholders expected
...
When exactly equal, if
you subtract the market value from the present value the result will be an NPV of zero
164
Chapter 7 -- Finance
(0)
...
A positive NPV is even better
...
25 means the market value of your stock is
$1
...
An NPV of $-2
...
22 less than the present value expected by your
stockholders
...
21
23
1
...
89
112
0
17
-1
...
Firm 112 is
exactly meeting stockholder expectations
...
Firm
17 might be making profits and its stock might be moving up very slowly, but its share
price at this point in time is $1
...
NPV is a highly respected method of ranking investments, or in the simulation,
ranking firm performance
...
If you have understood the concept even if you cannot do the problems you
still have gained valuable insights into how business people make decisions
...
Future Value is easier to understand since you have more experience thinking about
moving money forward rather than backwards
...
Calculating expected market prices for future
quarters will be of great help in understanding what stockholders expect of you and your
team partners
...
IPO price of your stock: _________?
Required rate of return by investors is 20% annual
...
You can calculate what the
value of your stock should be by the end of any quarter by multiplying your stocks IPO
price by the quarterly factors (factors are from a future value table using 5% per period )
...
0 1
...
103 1
...
216 1
...
34 1
...
478
Factor
Expected
Market Price =
$IPO x factor
165
Chapter 7 -- Finance
IMPORTANT STRATEGY: You can reduce the size of your stockholder's expected
market price and perhaps increase your firm's rank
...
Dividends are a cash payment
direct to the stockholder and help satisfy their desire for a 20% annual return
...
WARNING: Your firm must have positive retained earnings as shown on the balance
sheet in order to pay dividends
...
NOTE: There will be a difference in the calculation in the simulation program versus
your own calculation whether you use the NPV method or the Future Value method
...
This is done to make
sure that a poorly managed firm with some great luck in the 8 th quarter does not win the
game by chance
...
If your
stock is volatile and changing radically over the quarters the computer's ranking will be
very different than yours
...
A $4 IPO stock is not better or worse than a $2 IPO stock
...
So don't worry much about your IPO price
...
We offer a very short case aimed at your personal life long consumption patterns
...
Do credit cards work the same way? No, because credit card expenditures are not
used to purchase assets that increase in value
...
) before you can afford to buy them with
cash
...
1
...
What is the rate you expect?_________________ (A common amount is 20%)
3
...
4
...
5
...
02 = $________________________
...
Consume today using credit or discipline myself and
consume away 30 years from now? The 199
...
The 11% figure is a safe estimated average market
return when taken over a long period of time
...
30 years: $600 X 199
...
40 years: $600 X 581
...
Key Words:
Bond Discount
Compounding
Debt
Discounting
Dividends
Foreclose
High-Risk Debt
Investment Banker
IPO (Initial Public Offering)
Mortgage
Owner's Equity
Principal
Return
Volatility
167
Appendix C – The Second Trial Decision
Appendix C:
The Second Trial Decision
Appendix C will help you apply the concepts learned in Chapter 7 and prepare
your team for entering decisions for your second trial decision
...
If the first trial decision brought disastrous results,
perhaps the firm should analyze the marketing strategy and decide whether or not to
rewrite the vision statement, the marketing plan, or both
...
You will need to work with your team to design financial strategies that integrate
seamlessly with the firm's marketing strategies
...
By now your firm should have a good idea of the products your firm will be
distributing in the simulation
...
The more
seasonal, the more untested the product, the more inexperienced the management, and the
more competitive the industry the less debt a firm should carry
...
1
...
See your rate, which can
be found, at the top of your last Firm Report
...
A short-term loan is a good source when you need the funds
only for a short period of time
...
2
...
The
interest rate for a long-term loan is lower than the rate for short-term loans
...
The rate in the simulation is variable
...
In this
simulation, the banks have the right to change the rate once a year
...
3
...
The firm is obligated to make interest payments
each quarter (every 3 months) and also to pay off the bond discount
...
Since money is made available by lenders
for the long run, they are cautious about lending, and will only lend to high quality
168
Appendix C – The Second Trial Decision
firms
...
As your firm is entering startup decisions, your firm will not have a history of
retained earnings
...
After a 1/1
debt to equity ratio is reached, investors may still purchase bonds, but it will most
likely be at a highly discounted price
...
When all debt is added up (total
liabilities) and divided by total equity, the more moderate risk firms will be approaching
a 1/1 debt/equity ratio
...
That is, they will have only the minimum shares of stock issued (which in
this simulation is 300,000 shares) and they will have borrowed as much money as
possible from any source
...
They must be able to sell their
product, capture large market shares against competitors, have enough cash to cover all
interest payments, and must not make administrative errors
...
Before you rush into such a high-risk venture recall that additional risk increases
the expected chance of failure
...
Whether or not your firm elects to use debt, all firms must issue a minimum
amount of 300,000shares of stock
...
When results are available
on Monday, you will get a report back showing the results of your financial decisions and
how the accountant received the money and set up the corporate books
...
25 per share for
2,000,000 shares and $3
...
00 per share for 300,000 shares issued
...
The amount per share also depends on the state of the general economy
...
169
Appendix C – The Second Trial Decision
Practice Decision Forms
Marketing Decision Form
Advertising:
Area 1
Area 2
Product 1
___________
___________
Product 2
___________
___________
Prices:
Area 1
Area 2
Product 1
___________
___________
Product 2
___________
___________
Sales Reps:
Area 1
Area 2
___________
___________
Trainees: ________________
Change in Sales Rep Salaries:
Area 1
Area 2
___________
___________
Change in Sales Rep Commissions:
Area 1
Area 2
Product 1
___________
___________
Product 2
___________
___________
Credit Policy:
0
1
2
3
4
170
5
Appendix C – The Second Trial Decision
Budget Decision Form
Quality Control
Quality Control Budget__________________
Percentage of Budget to be spent on Product 2 ____________%
Financial Decision Form
Short Term Loan:________________________
Change in Term Loan:____________________
Issue or Repurchase Bonds
Issue Bonds __________________________
Issue or Repurchase Common Stock
Number of Shares to be Issued __________________________
171
Appendix D – The Scent Industry
Appendix D:
The Scent Industry
This appendix will detail the specifics of the Scent Industry
...
You will find market
information for the NAFTA and the EU markets, the seasonal sales patterns for both
Product 1 and Product 2, the patterns for product backorders, and other industry specific
information such as shipping and storage costs
...
Product 2,
or P2 is a ladies perfume
...
Product is sold by the case
...
In both markets (Area 1 and Area 2), simulated retail buyers are used to get the
product into retail outlets
...
Participants attempting long run forecasting at the beginning of the game are often
shocked by the variance in actual demand compared to that estimated in the market
research report
...
Thus, one scent market group can create a demand for units far in excess of
another, despite game administrators starting them with exactly the same parameters
...
It is helpful to remain flexible with forecasting early in the simulation, as it will
take your firm time to determine how demand in your market group is developing
...
Also, keep in mind that the starting demand may not be filled immediately
...
Thus, what
looks like rapid, industry wide growth in the early quarters may be the cumulative effect
of advertising and quality control expenditures
...
Currently, professional store buyers must turn to expensive, well-defined global brands or
172
Appendix D – The Scent Industry
less desirable imports
...
The aftershave market in both the NAFTA and EU markets, has a per case price
expectation of $100
...
As long as the
pricing, on average, stays within the $100 to $150 price range, demand is expected to be
substantial and stable
...
The market decreases as price increases
...
It is doubtful, however, that there is room for more than a couple of
firms in that niche
...
The cause of the increased consumption in the low price range is not fully
understood
...
Increased quantity applied to the face as price decreases
2
...
In the very low price ranges, aftershave is used as a deodorizer in shoes, under arms,
and splashed into air conditioning vents
4
...
The pricing structure is thus very important in developing and implementing
strategy
...
There might
not be room in the high-end niche or low-end volume markets if three or four firms
follow the same strategy in those markets
...
Both firms and those in
between the two extremes would have to construct the appropriate marketing program to
maintain their market shares
...
In the EU it is assumed to be about 20% less
...
The initial grab-for-market should be easy with no resistance
...
Seasonal Demand:
There is a sharp seasonal demand for men's aftershave
...
Most stores are living off stock left over from
the Christmas holidays
...
Quarter 3 is slow and
equal to Q1
...
Example of seasonal demand pattern for Product 1 as a percentage of annual sales:
Quarter 1 = 12
...
5%
Quarter 4 = 50%
Backorder Rate:
Firms have a high backorder rate for men's aftershave in Q1, Q2 and Q3
...
In Q4, however, if a firm cannot ship enough
product to cover sales, they will lose the sale and possibly the client
...
Firms participating in the aftershave market, as you can see, are presented with an
interesting challenge
...
That strategy needs to be designed by and coordinated with production, financing and
marketing executives
...
Professional store buyers have been looking for quality products at a price that would
undercut the world famous name brands
...
A market group average price for a case (considered 1 unit in the simulation) in
the range of $140 to $185 would seem ideal
...
Individual firms should set their own strategies
accordingly
...
However, it
appears that for the market group as a whole, if the average price rises too high, demand
will fall at an increasing rate (non-linear)
...
The reason for the barrier is that consumers will switch over to world
famous brands as the price differential narrows
...
Thus, in this unique situation, firms should compete on price as
normal
...
Initial demand for ladies' perfume is large - maybe gigantic! Response from
buyers would indicate a demand on the low side of 100,000 cases (units) annually for the
EU and 100,000 cases (units) annually for the NAFTA market; up to a high side of
250,000 units for the EU market and 250,000 units for the NAFTA market
...
The reason is that men purchase most of the ladies'
perfume
...
A sizeable
percentage of this new industry's consumers are very familiar with world famous, name
174
Appendix D – The Scent Industry
brand scents and can be expected to gravitate back to buying those world famous brands
...
The amount of leakage back to world-class brands is dependent, in large part, on
the reception women give to the men's original purchase of a new and less expensive
brand
...
If not acceptable, the male is less likely to purchase perfume on the
basis of price anytime soon
...
While males do make most of
the perfume purchases, it seems that women, in some fashion, exert influence on those
purchases
...
This entire process
takes place over time and is a most difficult area of market research
...
Research to-date indicates that the leakage can be stemmed, in part, by aggressive
marketing
...
One firm
alone cannot expend the resources required to maintain the initial demand
...
In the worst case as much as 40% of the original demand might revert back
to imports or name brands
...
By the
end of year 3, in the worst case, demand could slide to 90,000 cases in either area
...
Stores place orders and sell large quantities in January,
February and March (Q1)
...
The winter quarter,
Q4, is also large
...
Q2 and Q3 each have about
15% of annual sales
...
175
Appendix D – The Scent Industry
Inventory Carrying Costs
The firm’s warehouses will have ample receiving and storage space
...
The charges to
the firm, should finished goods storage be used, is as follows:
Finished Goods, Product 1 costs $
...
Finished Goods, Product 2 costs $
...
Shipping Costs
Shipping of the finished goods within the firm's market area is FOB
...
To ship the product overseas between NAFTA and the EU,
however, will cost your firm
...
25 per unit
...
Product 2 shipping = $6
...
Minimum shipment is 1000 units
...
Returned Products
The cost to retrieve, credit the client's account and replace or salvage a returned unit is
30% of that unit's sales price
...
Accurate forecasting allows for the
resources of the firm to be secured in advance at minimum cost
...
Accurate forecasting is difficult to achieve, especially when you consider that
each market group will develop a unique set of characteristics
...
This requires that teams stay alert to market changes and
determine the variables that most influence the changes in demand
...
Market Potential
Market potential is set such that an average market group price will create a
demand for "X" number of finished good units
...
Most firms find it
relatively simple to initially make sales
...
After that, growth continues or slows depending on
the political and economic events depicted in Dollars and Scents Quarterly
...
Most of the
sharp increases in sales are due to supply growing, not new demand
...
The base number is affected, as consumers would be,
by a host of market group inputs
...
However, as the
individual firms make decisions, their combined numbers affect the market potential
...
This difference in
the total number of units demanded is due to the participant's decisions, not the
administrator's design
...
The market group demand is also influenced by the motivation
and number of sales representatives promoting product for firms in a given market group
...
Another major influence is the total amount of advertising
dollars being spent currently and in recent quarters
...
Key among
these is the bill rate, which in part, is the measure of the money supply and economic
activity
...
If it sounds complex, it is
...
You will find sufficient information in the Market Research Reports to allow
you a reasonable start at forecasting
...
We recommend you monitor other market groups
that start in an identical position as yours
...
It often happens that identical market groups develop very different production
and marketing structures
...
For example, in a recent simulation, one market
group had five out of five firms attempting to niche the market
...
The average market group price was high, the
firms were small with few sales reps and little advertising (but high average quality)
...
Consumers went to high quality world famous
brands outside the scope of the simulation, opted not to buy anything, or went to cheaper
imports
...
This group had large firms with high volume firms in the middle price range and a couple
of market nichers
...
The market group had
matured and stabilized
...
Seasonal fluctuations are very sharp from
quarter to quarter
...
Using Product 1 in Quarter 3 as an example, it is obvious that the shift in demand
from quarter 3 to quarter 4 is quite large
...
It is important that the forecaster examine the
change from quarter 3 to quarter 4
...
5%
Q4 Product 1 demand = 50%
Dividing the Quarter 4 demand pattern by the previous Quarter 3 demand pattern,
it is obvious to see how the change in demand will affect overall demand for Product 1:
50% (Q4 demand) / 12
...
For example:
Quarter 3 total Product 1 units sold in Area 1 = 5000
Given the rate of change from quarter 3 to quarter 4, one can calculate the
expected number of A1P1 units to be sold in Quarter 4:
5000 (total number of A1P1 units sold in Q3) x 4 (rate of change in seasonal demand) =
20,000 total number of A1P1 units expected to be sold in Quarter 4
What if our example had been forecasting for Quarter 1 instead of Quarter 4?
Again using seasonal demand patterns for Product 1, follow the example:
12
...
25 (rate of
change in seasonal demand)
...
It is essential that seasonal adjustments be made in order to achieve accurate
forecasts
...
Forecasting Demand
Accurate forecasting is a difficult task
...
The future is uncertain
...
Be aware
however, as you work with the model that it is just that, a model
...
Learn your environment, the markets, the
competition, your own team's capabilities; and your forecasting will grow more precise
...
Forecasting Model
1
...
2
...
Multiply real market share times forecasted market demand
Determining Market Demand
179
Appendix E – Forecasting Demand
In order to begin, you must calculate from your own firm's numbers and those
given on the Industry Report, demand for the entire market group
...
Following are the variables that you must use to calculate overall demand within
your market group
...
The aggressive forecaster assumes that all firms
had similar backorders this quarter, and that no competing firms had backorders in the
previous quarter
...
Now, assume the firm in question had 5000 unit sales of Product 1 in Area 1 and
1000 backorders of Product 1 in Area 1 for Quarter 1
...
Their market share for Product 1 in Area 1 was 10%
...
Contract sales within the market group
for Product 1 in Area 1 was 4000 units
...
5
...
Conservative Calculation
Step1
5000 sales - 2000 B
...
last qtr/
...
5 seasonal rate of change) = 53000
Total = 53000 forecasted Quarter 2 demand for the entire market group
Aggressive Calculation
Step1
5000 units + 1000 B
...
this qtr /
...
5 seasonal rate of change) = 113000
Total = 113000 forecasted Quarter 2 demand for the entire market group
Determining Real Market Share
In the example above, the market group had contract sales
...
If you don't see wholesale sales listed on your market group reports,
you can skip this step and move on to the final forecasting figure
...
Therefore, your firm will need to
calculate your firm's market share of the non-contract sales
...
Continue with the previous example
...
To do this, subtract the contract sales
for the firm and last quarter's backorders for the firm from the unit sales figure
...
Note: do not use the forecasted number for Quarter 2, but the demand figure
for the current quarter (before the seasonal rate of change was applied)
...
Conservative Calculation
Step 1
...
O
...
2800/26500 = 10
...
Same as above = 2800 adjusted unit sales
Step 2
...
The last calculation is very simple
...
Conservative Calculation
53000 units x 10
...
He/she has
predicted a larger market and has thus adjusted the firm's market share accordingly
...
We need to get more aggressive if we want to bring
market share up
...
While
the number might not be exact, as long as you are consistent in your calculation process,
changes in market share will be useful marketing information on which to base decisions
...
The program
makes two attempts to locate one of your competitors with finished goods available in
that market area
...
If you are that
fortunate firm with finished goods left over after satisfying your clients, (even if you have
a poor marketing package) you will have great sales and a good market share
...
If a firm successful in marketing but weak in forecasting suddenly figures out
how to forecast more accurately, it can have a devastating impact on the market share of
a firm living on another's lost sales
...
How can you tell if you are at risk in such a situation? It is very difficult to do so
...
If a firm has no backorders, no sales lost and
no finished goods inventory, they either hit a one in a million chance of making exactly
the amount that was demanded, or professional buyers wanted the other firm's products
but had to settle for yours instead because the other firm stocked out
...
182
Appendix E – Forecasting Demand
Loyalty is something that is built up over time
...
By the end of year two, some firms will have built some loyalty into
their product lines
...
Don't count on
product loyalty to defend your firm from an aggressive competitor
...
A carefully implemented and very aggressive non-price marketing attack may be
hidden from your view by the competing firm's inability to fill demand
...
The competitor may have been waging war for three quarters and you were not aware of
it
...
In this case, your market shares could slip from 35% say
to 5% in one quarter
...
That will help, but little market share will shift your way since the competitor now has
loyal clients
...
Be careful unless your firm has some
cost advantage over the competitor
...
The program simulates
professional buyers and end consumers with advertising and quality memories
...
Consider matching per unit, not total budget unless both competitors are about the same
size
...
That is, do in one quarter what your competitor did in three
...
Maybe you can catch your competitor napping!
Remember that it is not the total amount of monies thrust into marketing that
counts, but rather understanding the variables and designing the right promotional mix
...
For a dollar spent on marketing, what got you the most sales for a particular
product in the past? Was it price, quality, reps on commission, base salary, no sales lost,
credit policy, advertising, stability in pricing, quality and service? Is the mix different for
P1 and P2?
In this regard, realize that consumer sales fluctuate with interest rates, average
market group prices and other variables
...
Be aware that it is not just you and your competitor(s) slugging it out
...
This magnification of consumer buying behavior
is due to inventory patterns of wholesalers, distributors and retailers
...
Conversely, if demand suddenly skyrockets, supply
could falter and some distributors would be left without enough product to cover demand
from retailers
...
In past simulations (not all of them), news
reports predicted changes in the way consumers reacted to a product
...
A forecast
model should be used for forecasting, but the results tempered by common sense
...
Businesses can source information easily and rapidly
...
The needs of business in this regard are fairly
complex
...
Also, we noted
that individuals and teams are now more often in direct contact with suppliers and
customers
...
For national and global firms, offices, warehouses and production facilities
are in different sites and even in different countries
...
Poor
information will usually produce poor results at the consumer end, the supplier end and in
the corporation itself
...
Businesses are turning to new information
technologies to improve the processing, the quality and the speed of information systems
...
They must also be able to access the
same set of corporate data
...
We need to have a security
system that will allow files to be accessed by designated employees only
...
They must
not be able to alter the record
...
When a note is written, it should automatically be sent to our Customer
Relations staff so the problem can be resolved
...
I need a system that will allow supervisors at all locations to report electronically
when an employee fails to report to work or reports late to work
...
We need a system that will allow purchasing to automatically mail out invitations to
suppliers so they can bid on an order of merchandise we wish to purchase
...
We need to have vendors reviewed by a top level officer and on satisfactory
completion of that review, have that officer enter the vendor name and address
...
There are two major forces at work in most
186
Chapter 8 – Management Information Systems (MIS)
firms as they attempt to satisfy the firm's need for information systems
...
The
individual or team purchasing the equipment might seek the advice of the vendors of such
equipment and the advice of technical staff within their firm
...
They are less focused on the immediate information retrieval or data processing
needs of any one specific business unit
...
To do their job well,, each employee must have the information available at the
time it is needed
...
There should not be
opportunities to see more than is necessary, nor the opportunity to tamper with the
system
...
When top management starts
integrating the entire business organization based on a management information system,
it is certain that many jobs will be terminated and many other job vacancies requiring
different talents and skills will be opened
...
Integrating an information system affects all segments of the firm
...
It will take time to determine what the information
system needs are
...
It will take time to
restructure the work force through hiring, firing and retraining
...
The time horizon (how
far one plans or sees into the future) for bringing an integrative information system into a
large corporation might be six years
...
Purchasing Office Supply Case:
A case of very minor significance is presented here so you can visualize what the
integration process might involve
...
Do not study this case
...
Assume each department will need printer paper, refill cartridges and other office
supplies
...
The departments will all send their purchase orders up
to the purchasing department
...
Some of the orders may be emergency type orders because the department did not order
on time
...
The orders are sent
...
Another set of the orders are sent on to the accounts payable
department
...
Hopefully the order document specified which department was to receive
which material
...
If they were, receiving will need to break open all
the boxes on the shipping dock in order to sort what goes to which department
...
It is not uncommon for some items not to be shipped
...
In the meantime, accounts payable has a copy of the original order and
has contacted the finance department, informing them to have a certain amount of cash in
checking ready to pay the forthcoming invoice
...
Accounts payable will authorize payment
...
Hopefully, a copy will not also go to the finance department
...
This whole process of ordering office supplies is complicated and time
consuming
...
The supply volume
could be cut by 50% or more if the equipment in all departments was standardized as part
of the overall redesign of the firm's information system
...
The time to order would be based on volume
discount
...
The vendors would bid within the time requested
...
At that time, the management
information system automatically orders, automatically notifies the other vendors that
they did not get the bid, automatically notifies the receiving department that this order
will be arriving on a certain day which the computer selected based on how busy the
receiving dock was, automatically notifies accounts payable of the order and finance of
the coming payment
...
In this case, the effort to purchase office supplies does not directly involve what
the firm does to earn revenue
...
The
entire process of purchasing office supplies through an MIS designed system took fewer
people, less time and saved money
...
Some employees would need to acquire new skills to work in such a system
...
Some employees would be fired and new people that had the newly
required skills would be hired
...
Human resource
management would have the task of upgrading employee job skills
...
If this were done in all departments of a large corporation on a global scale,
the changes would be dramatic
...
Many firms are struggling to maintain existing systems
and cannot expect their technical staff, even if they had the expertise, to create a new
fully integrated management information system
...
They understand the benefits that will be enjoyed by their customers, the efficiency gains
that will be made by people working in the firm and the increase in long term profits for
the stockholders
...
Several firms offer fully integrated management information systems along with
the support staff to help in the integration process
...
In addition to the purchase, the firm will also expend a great deal of time and
money to implement the program
...
Integrated management information systems change the way a firm does business
...
Implementing the MIS System:
The companies that sell the management information systems to firms work to
tailor the product to the specific needs of a particular firm
...
They must work with each department
...
They will be enhancing, and to some degree, limiting the marketing department's
ability to sell its products
...
They also need to know the
clients of the firm and how the marketing department interacts with them (as well as how
shipping, accounts receivable and servicing works with them)
...
We have highlighted MIS in this discussion since it is a popular route to
189
Chapter 8 – Management Information Systems (MIS)
employment for business school graduates
...
We will also provide comments from recent MIS
graduates so you can get a feel for the career, its work environment and long term
potential
...
Even running a household today requires programming the VCR,
the heating and cooling system for the house, the security alarm, perhaps the watering
system and the satellite or cable entertainment system (TV)
...
Many individuals have home computers that are globally linked
through the Internet
...
While you are doing just that, some third graders, as you read this, are downloading
Internet data from several sites to use in a report for a school project
...
Imagine the skill level of those individuals when they enter the job market twelve
years or so from now
...
Your pay might be substantially higher than
that of the newcomer
...
Will you have
acquired the new skills to stay competitive and hold your own against the new
competition? Can you justify your higher salary to your supervisors?
To build a career in today's business environment requires that you constantly
build your skill and knowledge level
...
They want a short training period and expect you
to "get to work"
...
”
191
Chapter 9 – The Process of Change
THE PROCESS OF CHANGE
In the chapter on management, we discussed the process of change
...
Following is a discussion that will help you
understand change as it relates to your personally
...
It will help you visualize your life within a society that is
"on the move"
...
If we could go back in time, there are many generations that would share the same
feelings
...
The group of Native Americans living in
Northern California before recorded history certainly saw change
...
The power of the new group was one of technology, the bow and
arrow
...
Change is always with us
...
Change as a
process, can evolve in a society through multiple generations
...
Revolution
is a better word to describe change that occurs so suddenly that its full impact is felt on a
single generation
...
So have the last few
generations
...
By 1800, the industrial
revolution was well underway
...
Industrial production, to be
efficient, needed resources close by which included human resources
...
If you are wondering why we are taking a side trip into history, we believe this
historic overview of the business environment is of extreme importance to you
...
The industrial revolution started in England between 1730 and 1800
...
If
that is true, the rate of change that people experienced in England in the early 1800's will
continue in your life at an even faster pace
...
How did individuals cope with such stress in their life? How well did your
grandparents handle rapid change? How did they adapt and not feel left out of the
system? What about your parents and relatives of their generation? Did they take the
"curse" of living in interesting times, and turn it into an opportunity for themselves and
their children?
The Revolution Continues:
192
Chapter 9 – The Process of Change
We need to first understand the revolution in terms of business and jobs
...
Economic and business researchers sometimes categorize areas
of work where value is created as agriculture; industry; service, and/or information
...
We know that around 1730 to 1800 the industrial revolution accelerated the rate
of change
...
S Department of Commerce report, in the late 1880s, about
10% of the U
...
work force was employed in the information area; 25% in the service
area; 25% in the production area and 40% in agriculture
...
The dramatic decline in farm workers continues today
...
Just as
surprising, is that the information sector of the economy has become the largest work
force sector
...
Textbooks often
discuss change as an historical event, an economic event, or a part of the changing
business environment
...
We want you to go with us to Northern
Wisconsin to see the end result of two generations of work
...
They prospered as entrepreneurs, by
fighting a hostile environment
...
The next generation faced technological change
...
Milk and
cheese were more efficiently produced in large-scale plants
...
The new technologies at the dairy plants required a consistently
clean raw material (milk) with certain standards of butter fat
...
The dairy
farm had to have a new technology, a bulk tank system for storing milk, which was then
loaded into a bulk tank truck
...
Once
installed, the only way a farmer could cover the increased fixed expense was to increase
the size of the dairy herd
...
Milking that many cows could not be
accomplished by hand
...
The change in herd size from 20 to 100 cows meant larger feed storage in barns
and silos
...
The second-generation farmers that took the risk and survived have modern
farms
...
Some risk takers went
excessively into debt to buy the new technology
...
It would appear as though taking risks might not be the
thing to do
...
In this regard, failure to
take risks was the greatest risk of all
...
The next
generation inherited the business
...
Within the lifetime of the second generation, the farm was gone, the success and dreams
of a previous generation destroyed
...
These were real
people, struggling through "interesting times"
...
However, there are political threats
...
Milk is now being dried and
can be shipped anywhere in the world
...
A
new hormone can dramatically increase milk production in a cow
...
This case represents the basic tenants of supply and demand at work
...
In this case, the producer (the dairy
farmer) would stimulate demand with pull promotional strategy
...
But if their "Got
Milk?" national campaign is not successful enough to increase demand needed to meet
the new supply, prices will fall
...
The economic term is marginal
...
Winners and Losers in Change:
Change allows proactive individuals a greater opportunity to achieve material
success than the rest of society
...
Some industries, businesses, and individuals will not survive very well in periods
of rapid change
...
But when every dairy farmer adds a few milking cows, the supply of milk goes up and
the price down
...
Should
government allow this scenario to work itself out, or should government try to regulate
how much each farmer can produce? For farmers that go bankrupt, should the
government provide some type of assistance, such as a relocation or education
194
Chapter 9 – The Process of Change
allowance? Or, should the capitalistic system simply be allowed to function without
interference?
Education is one of the key factors allowing individuals to analyze their
environment and find a way into a career, or out of a failing business, or a doomed career
...
If this is the case, wouldn't society be a better place to
live in if everyone were provided access to an education? Can a society afford to offer
education to the general public? Would taxpayers put up with the staggering tax bill that
public education would produce?
If a system were to provide this educational opportunity to everyone in the
society, what responsibility would the society as a whole have toward those that elected
not to participate? What will become of the young adults that fit this description? What
will become of the middle aged farmer that just lost the family farm? What will become
of the older individual who cannot afford to retire but who failed to keep up with
technological changes on the job?
Management:
Refer back to the chapter on management
...
As the work force
is shifted by a change in needs, management must constantly reorganize the manner in
which a firm does its work in order to stay efficient and thus competitive
...
Firms need
to attract the new talent desperately needed in the information age
...
Key Words:
Marginal
195
Appendix F – Bankruptcy
Appendix F:
Bankruptcy
With luck you will never need this final chapter
...
Unfortunately this is not always possible
...
This chapter will help you to figure out whether you are in danger of
bankruptcy and what actions you can take to salvage your firm
...
What is Bankruptcy?:
When you have lost 100% of the stockholder's investment, your firm is
considered bankrupt
...
When this occurs, creditors will seize your firm's assets and
begin selling them off in an attempt to regain some portion of their investment
...
Salvage Options:
If large losses continually erode your stockholder's investment, consult with your
instructor
...
Issue more stock
...
All
investors must be warned and your instructor must grant permission
...
Search the balance sheet for assets that can be liquidated
...
Liquidate accounts receivable by factoring
...
This can be achieved by forecasting demand
...
3
...
Perhaps they will agree to
payment only if and when profits reach a predetermined level
...
Enlist the aid of Venture Capitalists
...
can be reached through
your simulation administrator
...
These investors will exchange
shares of stock for debt in a private off-line deal
...
Consider this your last line of defense
...
Abandon the sinking ship; say so long, bye-bye! This will be a traumatic event for the
team and for each team member
...
Remorse and depression can only be a momentary event
...
Securing permission from your instructor for a firm
closing and the opening of a new firm may require a grade concession or extra work
agreements (such as a major paper on why the firm failed)
...
Most firms that find
themselves in trouble can eventually work themselves out of it
...
Realizing early on that the firm is headed for trouble is the
best defense against bankruptcy
...
If Total Equity gets below
$800,000 be sure to ask your instructor or the Global View tutors for help
...
The other major reason for bankruptcy is failed human resource
management
...
Members of the team that do not fully understand
information gathered from reports should not be solely responsible for making decisions
...
Now
that your team is fully operational within the simulation, the team should have a good
understanding as to whether or not this process works well
...
Another
option is to relocate one or two executives to another team and attempt to hire new
executives onto your team
...
The Process of Starting Over:
It may be difficult to admit defeat and start over
...
However, it is much more fun to operate a successful
business, in comparison to the constant struggle of trying to revive a badly damaged firm
...
To close an existing firm and start another, your firm must have permission from
your instructor
...
When entering new decisions, you will see old decisions remaining in your decision
form
...
Old
decisions will not download to your new decision file for processing
...
197
Appendix G – Quick Guide to Decision and Contract Entries
Appendix G:
Quick Guide to Decision
and Contract Entries
This guide is not meant to replace chapters of the text
...
Use this guide as a quick reference
when you are at the computer entering decisions
...
To Login to the Simulation
Go the Association Global View website: http://www
...
org
Click on the "Simulation" tab at the top of the homepage
Type in the login and password your instructor provided your team (using all
lower case letters)
Click on the "Login" button
Simulation Login
Login: introfirm18
Password: xxxxx
Login
To Review Your Firm Profile or Change Your Password
Click on the plus symbol ( + ) next to "Management"
...
198
Appendix G – Quick Guide to Decision and Contract Entries
Change Password -- allows a team to change their password by which they enter the
simulation
...
To Enter Decisions
Your team will not have access to the decision/contract decision menus until all
subscription fees for this program have been paid
...
If everyone has paid and you still do not have
access to decision/contract menus, contact your simulation administrator immediately
...
To enter decisions, click on the plus
symbol next to "Decisions"
...
+ Management
- Intro Game
- Decisions
Marketing
Budget
Financial
Shipping
+ Contracts
+ Firm Reports
+ Market Group Reports
*Absolutely NO entries should be made with commas
...
A
decision form can be updated as many times as needed between
quarters
...
199
Appendix G – Quick Guide to Decision and Contract Entries
Marketing Decision Form
Advertising
Area 1 Product1
__________
Product2____________
Area 2 Product1
__________
Product2____________
Prices
Set product prices for 1 unit (1 shipping case) of product
...
00
Area 2 Increase or decrease pay _________Current Pay: 0
...
00
Increase or Decrease Product2 Commissions_______Current: 0
...
00
Increase or Decrease Product2 Commissions_______Current 0
...
Entries DO NOT build on previous quarter's entries
...
Enter Area 2
prices in EURO's
...
In the opening quarter,
exchange rates are listed in Dollars and Scents Quarterly
...
Sales Reps -- Enter the NEW TOTAL amount of sales reps your firm would like in each
area
...
If you increase the amount of sales reps, the program will automatically
check to see if your firm has any trainees trained and ready to be placed
...
To place trained trainees as sales reps, enter the new total amount of sales reps into the
sales rep decision form (previous sales reps plus trainees being placed as reps)
...
Entries DO build on previous entries
...
Never enter a negative number or you will fire trainees you have already trained
...
Entries DO build on previous quarter's entries
...
After your first set of
results are returned if your team is satisfied with the salaries you have set for sales reps,
enter a zero into the salary decision to prevent the salary from increasing
...
Change in Commissions -- Enter the amount by which your firm would like to increase
or decrease (with a negative sign) the sales rep's commissions
...
Entries DO build on previous quarter's entries
...
201
Appendix G – Quick Guide to Decision and Contract Entries
Budget Decision Form
Quality Control
Quality Control Budget __________
Percentage of Budget to be spent on Product 2%________
Budget Decision Form
Engineering Studies -- NO ENTRY REQUIRED
...
Quality Control -- Enter the total dollar budget your firm wants to spend on QC for all
products in all areas
...
Entries DO build on previous quarter's entries
...
This entry is only for
manufacturers
...
S
...
00
Change in Bonds
Enter the dollar amount of Bonds to be issued__________
Enter the dollar amount of Bonds to be repurchased _________
Current Bonds = 0
...
50 cents increase per quarter)______
Last Quarter's Dividend = 0
...
Then click on the investment option your firm would like
...
Factor Receivables -- Enter the total amount of receivables your firm would like
factored
...
If you enter an amount that is higher than the actual amount of
receivables your firm would collect, the total amount of receivables owed to your firm
will be factored
...
Short Term Loan -- Enter the total amount of short-term loan your firm would like to
borrow for the coming quarter
...
Entries DO NOT build on previous
quarter's entries
...
Any new term loan taken out will be added to the outstanding loan
balance from earlier quarters
...
Change in Bonds -- In this decision form there is an option to issue bonds and an option
to repurchase bonds
...
Any new
bond issue will be added to the total amount of bonds previously issued in earlier
quarters
...
Issue or Repurchase Common Stock -- In this decision form there is an option to issue
stock and an option to repurchase stock
...
Any new stock issue will be added to the total amount of shares
previously issued in earlier quarters
...
Declare Dividends -- Enter the amount your firm would like to issue as a dividend to
stockholders
...
Units must be shipped in lots of 1000,
with a minimum shipment of 1000
...
Emergency Shipping -- Click yes if your firm would like to air freight one unit of
product as needed from an area where product is overstocked to an area where inventory
is at zero
...
See the Scent
Industry Appendix for information on costs
...
A portfolio of U
...
Treasury Bills
1
...
An Investment in the Bear/Bull Index Fund
3
...
Next in the contract form select "Buy Goods", and
select the firm number of the team you had an agreement with
...
Next, select
the product type, enter the number of units, enter the price per unit, enter the area your
manufacturer requires you ship from, and the area you want the product shipped to
...
Sell Goods
Select the firm in the Advanced Game you have an Agreement with:
N/A
Select the firm in the Introduction Game you have an Agreement with:
Peacock Industries(18)
Which Product: Product 1
3000
How Many Units:
Cost Per Unit:
Product 2
80
Ship from which area: Area 1 Area 2
Ship to which area: Area 1 Area 2
Submit Query
209
Appendix G – Quick Guide to Decision and Contract Entries
After submitting the contract to the database, a confirmation screen will appear
...
If the
contract is exactly what you want, select the "Execute" button and then hit "submit"
...
If you Execute but do not
submit, there will be no record of your order
...
E-commerce contracts
are legally binding
...
Confirmation Example
Agreement made and entered into by and between Firm 18 (Intro),
herein referred to as "Seller", and Firm 18 (Intro) , herein referred
to as "Buyer"
...
00 per unit
...
Seller furthermore agrees to pay the 6% contract fee associated
with a sale of finished goods
...
111:06:26:2000:1
1
Execute offer as a valid contract
Wait for approval by other Party
Defer decision until later
Cancel this offer
Submit Query
You will need to repeat this process for each type of product you order in each
area
...
31
Chief Executive Officer
CEO
...
27
Collect On Delivery
COD
...
53
communism
...
13, 19, 42, 54, 55, 66, 74, 115, 118,
169
consumer
...
16
Contracts
Quick Guide to Entering Contracts
...
86
contribution margin
...
115
4
4 P's
...
49
Price
...
48
Promotion
...
47
A
Accounting
...
99
Balance Sheet
...
100
Income Statement
...
99
retained earnings
...
16
Advertising
direct marketing
...
60
promotion
...
60
agents
...
25
amortized
...
124
assets
...
99
D
Debt
...
206
Decision Making
...
199
depreciation
...
49
dividends
...
109
E
B
earnings per share
...
26
Economic Environment
...
108
Economic Situation
...
31
elastic
...
24
entrepreneurs
...
14
equity
...
100
EU
...
14
Exchange Rate
...
56
Balance Sheet
...
196
Salvage Options
...
197
What is Bankruptcy?
...
197
Bill Rate
...
168
Bonds
...
61
break-even
...
50
Bull-Bear Index
...
22
Business Communication and Advertising
...
26
business partners
...
110
Finance
Financial Assessment Methods
...
161
Payback
...
23, 27, 42, 47, 58, 151, 154, 155
capitalism
...
103
CC Scale
...
164
Finished Goods Inv
...
115
FirstClass
...
177
foreclose
...
30
Initial Public Offering
...
32, 44, 75, 106, 167, 190, 195
L
Land
...
99
liability
...
25
listing
...
30
Long-term loan
...
30
Global View Administration
...
18
Global View Simulation:
...
16
gross profit
...
86
Management
...
189
Implementing the MIS System
...
186
Management information systems (MIS)
...
50
marginal
...
71
Margins
Margins on Cost
...
73
Margins on Retail Price
...
179
Market Group
...
177
market region
...
66
Market Share
Determining Real Market Share
...
49
Markets
...
71
mortgage
...
154
I
Income Statement
...
126
Sales Revenue
...
121
Income Statement
Net Sales
...
122
Income Statement
Advertising
...
122
Income Statement
Bad Debts
...
123
Income Statement
Miscellaneous
...
23
indexes
...
108
inelastic
...
108
infrastructure
...
46
Interest on Bonds
...
124
Interest on Term loan
...
44
inventory
...
123
investment
...
152
IPO
N
NAFTA
...
194
name recognition
...
25
net
...
64
net profit after tax
...
110, 111
New York Stock Exchange
...
22
North American Free Trade Area (NAFTA)
212
Index
Area1
...
164
retained earnings
...
101
return
...
23
risk and return
...
153
Ownership
...
T
...
115
sales representatives
...
172
Inventory Carrying Costs
...
174
Backorder Rate
...
174
Seasonal Demand
...
172
Backorder Rate
...
172
Seasonal Demand
...
176
Seasonal Pattern
...
20
securities
...
24
Short-term loan
...
26
socialism
...
24
stock investors
...
110, 111
Stockholder Accounts
...
25
strategic management
...
37
Strategic Management
...
18
subsidizes
...
30
Page One Of The Firm Report
Backorders
...
120
Market Share
...
118
Unit Sales
...
117
par value
...
24
Peacock Industries
...
85
Place
...
27
Political Situation
...
67
Pricing
...
65
Price Based on Cost
...
66
Pricing Using Margins
...
110
Prime Rate
...
153
Private labeling
...
48
Product 1
...
14, 20, 63
product awareness
...
66
Product Loyalty
...
55
Business Communication and Advertising
...
56
Retail Promotion
...
58
The Push Strategy
...
56
Pull Strategy
...
57
T
tariffs
...
109
term loan
...
19
Time
...
153
Total Assets
...
98, 126, 133, 136, 139, 142, 145,
148
treasury bill
...
53
R
rate
...
108
213
Index
vision
...
42
U
unamort
...
102
Unamortized Discount
...
58
W
wholesale market
...
56
wholesaler
...
103
V
variable cost
...
151
214
Title: Ultimate Business Tips for Beginners
Description: understanding so each student will exit the course having a strong foundation in business and in critical thinking which will support them in future course work and through life?
Description: understanding so each student will exit the course having a strong foundation in business and in critical thinking which will support them in future course work and through life?