Great enthusiasm by some teams. Tentative/cautious/unsure... steps by some others. Who created serious wealth is the question...

Transcription

1 Dear Participants, Great enthusiasm by some teams. Tentative/cautious/unsure... steps by some others. Who created serious wealth is the question... We've done 13 practice rounds now brace for the competition rounds. You are all experienced managers now. Before you begin the competition rounds please do pay attention to: Have you sat and brainstormed as a company (team) what is your company s passion, what is your company s DNA, what excites you, what does your company want to do? Remember, your company reflects you your thoughts, fears, aspirations, predilections, caution, risk,etc. Now... Given your passions and given the resources and capabilities that you possess, what is your company s vision. Your vision is simply an expression of a desired end state (eight years from now) that you wish to accomplish. Try and visualize it as accurately as possible. Now given your vision and your strengths (capabilities and resources) what is the best for you to do given a competitive environment. Thus you now... Perform a Market Analysis, i.e market segments, market sizes, their growths and what is the share you intend to capture. Remember, analysis of the market sizes, growths and your share are a foundational part of your strategy. Now formulate your strategy industry, company and segment wide. Your strategy is nothing but integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage. Gaining competitive advantage is vital, else you will get what everybody else gets. And remember, the heart of business lies in the execution. Wonderful strategy, but poor execution will let you down. PLEASE READ THE NOTE ON FORMULATING YOUR COMPANY S VISION AND STRATEGY(BELOW): SIMPLE, LUCID AND SUCCINCT. After 13 rounds, I'm sure you re able to now see the cross functional interlinkages and the decisions that drive the key metrics that are important to your company. A few observations (based on the last practice round) as we commence the competition rounds. 1. Emergency Loans (an inseparable companion to some teams) : Some teams are plauged by this problem. The causes are easy to isolate. Lets talk about them. Remember, your cash account is like a bucket of water - if the level falls to zero - your cash account is nil and you have a liquidity crisis. Operating profits, stock issues; short/long term debt issued, sale of plant are some of the major items that add to your cash account bucket. Building inventory, SG&A expenses, plant expansion/improvement, retiring debt, buying back stock, etc deplete your cash account.

2 If you expand or improve automation of your plant - you have to fund it. Where will the money come from? It s best to balance long term investments with long term debt. You never buy a house with a credit card, do you? Why not? Its the same logic here. If you build huge inventories that do not sell, you've in effect converted cash to inventory (which did not sell and convert back to cash) - and hence you cash account is reduced to that extent. Moreover you pay a large inventory carrying cost on the unsold inventory -which reduces your operating profits which further impact your cash in flow. If you re repaying back an emergency loan that you got in the last year, that itself is a cash outflow and has to be matched with some inflow(s). Very low contribution margins could mean the cash account is hurt and could complain to Big Al. How do we handle all this? Your finance spreadsheet is like a finance ERP of your firm - based on your decisions in R&D, pricing, promo, sales, HR, Production, etc - it projects you ending cash balance for the year. Lets say your projected closing cash balance for the year is $23 million in the Finance sheet. That figure is simply a projection based on your sales forecasts and other decision inputs. If your sales are lower than your projection, that closing balance diminishes to that extent. If you sales are lower still, say $25 million lower that you thought, your cash account will turn negative. So what should we do? Its logical and prudent to run scenarios. Run a worst case scenario for sales - and then borrow enough that you have a positive cash balance to cover this scenario. E.g, you feel you will have $146 M of sales in the year - think, what is the least that you could possibly sell - i.e if the worst were to happen, what is the minimum amount you could sell? $138M, $129 M, $119M... whatever? (this requires a careful analysis of the competing products). Once you've put a finger on your doomsday scenario, make sure you fund enough to have a positive cash balance. This way, if your worst nightmares actually turn to reality, you will still have enough cash balance to avoid a liquidity crisis. And if things don't tun out so bad, so still have the cash! Your scenarios depend on your appetite for risk and the depth and accuracy of your analysis of the competing products and your forecasts. If you got an emergency loan of say $28 Million this year, remember, it has to be repaid the next year. So, in the next round, please raise enough funds to cover this cash outflow apart from the other cash needs 2. A wise team never gives up on profits - margins are paramount. In the simulation, we're here to create wealth for our shareholders. 3. Remember the trade-offs in all the decisions you make - nothing is business is linear - think what makes logical sense given your strategy and marketing mix. 4. When it comes to market share, please be absolutely allergic to conceding an inch. Like they say in business, "your competitor did not take your market share - you gave it to him." Large losses in market share are like handing your head to your competitor on a plate (sorry for the strong simile).

3 5. Please give the customers what they want - never lose sight of the customer buying criteria. Consider the ideal spots on the perceptual map, where customer demand is densest. 6. Please pay attention to your sales forecasts. Bad forecasts can upset many a good business plan. All the best with the competition rounds. May the best team win!! PS: Please remember to save you decisions periodically. Please see your decision summary in the Capstone sheet after saving so that you can confirm that your intended decisions actually saved. As an added layer of precaution, please logout and re login to Capstone and see if the decisions saved correctly. If you feel there is a cache problem in the institutions network - please request your campus network administrator the clear the cache as frequently as feasible. I think it would be advisable to do so. A Note to Help Formulate Your Company s Vision You Company s vision is a simple statement. It should be clear and unambiguous (and should not need legal help to interpret). The statement should present as accurate a picture as possible for your company at the end of the simulation eight years from now. It is not important that the statement read well that is, we are not looking for something like a polished public relations statement. A list of bullets might be best, so long as it provides clarity to all team members. It is also appropriate to say what you will not be. Here are some questions you can reflect upon to bring your vision into focus. 1. By segment, how many products will appear in the segment? 2. What will our capacity and automation levels be in each segment? 3. How much money will we have invested by the last round? 4. What will our financial structure look like? The financial structure is everything on the right hand side of the balance sheet. Fundamentally, it summarizes how much of the assets were funded by debt holders and equity holders. You can get the financial structure you have today by looking at your Annual Report. On the right hand side of the Balance Sheet, you will see your financial structure in percentages. To determine what sort of structure you want, you can ask several simple questions. a. What mix of long term debt, stock issues, and retained profits do we need to grow the company? b. Do we want to keep profits or pay them out as dividends?

4 c. Do we want to pay off our debt to avoid interest payments? d. How would we express these in percentages?. For example, 5% Accounts Payable, 0% Short Debt, 35% Long Debt, 20% Stock, 40% Retained Earnings. 5. Are we biased towards cost leadership or differentiation? You will find a short essay on Mission and Vision statements at In their context, we are marginally interested in Core values and Core purpose (which are known and common to all teams), but we are keenly interested in Visionary Goals. Now Critique you Vision Statement Any good vision statement makes choices between alternatives. For example, if your vision places you in the Traditional and Low End, you implicitly plan to give up High End, Size, and Performance. The Critique looks at what you are giving up, and at the threats you face. You are comparing the potential of your vision against alternatives. Prepare an essay that explores these issues. Here are a few questions that might help to develop your thoughts. 1. How likely is it that competitors will choose a similar vision to the one you have selected? 2. Does our vision require significantly more investment than alternatives? 3. Is our vision difficult to execute? For example, does it require a broad product line? Heavy investment? Many segments? If it is more difficult to execute than alternatives, that could be good or bad. You might offer a few words on the trade-offs. 4. How long will it take execute your vision relative to other plans? 5. Consider growth rates. Over all, the market will grow 150% over the next eight years, but the growth is uneven. Is your vision attractive for, say, the first four years, and less attractive in the last four years? Outline Your Strategy: A Note At the beginning of the simulation, your team faces an unusual business situation all companies and products are identical to each other. In the real world this situation rarely if ever occurs. The closest analogue might be a highly regulated industry. Looking into the future, the simulated industry will rapidly differentiate. Nothing you can do will stop it. Given time, the industry will evolve into a state where competitors occupy defendable strategic positions. There are two important questions. How long will the process take? Will two or more competitors attempt to occupy the same position?

5 Let s use an analogy. Picture a flat landscape. Now imagine several hills placed on the landscape. Each of the hills represents a strategy. Your success depends upon how quickly you can identify a hill, and how high you can climb it. Your hope is that you will choose a hill that nobody else picks, and that you can defend it against competitors. Complicating this is the fact that some hills are more attractive than others. Further, the more companies trying to climb a particular hill, the more difficult it is for each of them to successfully climb it. Are there methods and techniques that will help you identify and select these strategic hills? Yes, the general topic is widely discussed. Let s look at one of the most commonly referenced, Michael Porter s Generic Strategies. Read the description offered on The QuickMBA website at (A quick search of for Porter Generic Strategies will turn up hundreds of alternate references. The QuickMBA s one page summary is an excellent overview of the topic, but feel free to examine others.) Next, review Chapter 10 of the Student Guide, "6 Basic Strategies." With this as background, select or develop a strategy you would like your team to pursue. Prepare and post an argument for your strategy. The argument should address these issues: 1. Segments. Which segments matter to you? How much share of those segments must you achieve to be an average competitor in the overall industry? For example, if you choose to play only in Traditional and Low End, you would have to command a higher share of those segments to achieve average industry sales. 2. Profit potential. 3. The speed at which you can create a defendable position. For example, new products typically take two years to bring to market. Significant productivity improvements could take several years. 4. Priorities. Which products are most important to you? Which are least important? A Note on Market Share Generically, you want high overall market share for three reasons: 1. You began with a sizeable fixed asset base. You want to utilize your plant and equipment to pay for depreciation and service the long-term debt. Idle plant costs money. As it gathers dust, it also hands you a bill for depreciation, interest, and eventually the principal on the funds used to buy the equipment. Therefore, so long as you at least break even, you would prefer to utilize all of your capacity. That implies high sales volume.

6 2. You began with a large company doing business in every segment. An investor would argue that any strategy you develop, including niche strategies, should produce at least average sales. For example, a focused strategy should produce higher share in the target segments, enough to compensate for sacrificing positions in abandoned segments. 3. If you make a sale, a competitor did not. This weakens competition over the long haul.