Read C492 OHs Fall 2003.indd text version

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WELCOME TO Comm 492 U.B.C. STRATEGIC MANAGEMENT SIMULATION

CAPSTONE® from Management Simulations, Inc. of Chicago, Illinois ("Capsim") This simulation is currently used at several hundred corporations, colleges and universities

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STRUCTURE OF THE SIMULATION:

2 separate industries (C492A and C492B) Oligopolies producing electronic sensors Up to 6 firms in each industry (A, B, C, D, E, F) In each industry, firms compete among themselves Firms produce between 5-8 products in 5 market segments 4 - 6 students per firm

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INDUSTRY #1 C492A "C6590" FIRM #1 "Andrews" CEO Mkt Prod S.P. Fin FIRM #2 "Baldwin" CEO Mkt Prod S.P. Fin FIRM #3 "Chester" CEO Mkt Prod S.P. Fin

FIRM #4 "Digby" CEO Mkt Prod S.P. Fin

FIRM #5 "Erie" CEO Mkt Prod S.P. Fin

FIRM #6 "Ferris" CEO Mkt Prod S.P. Fin

INDUSTRY #2 C492B "C6591" FIRM #1 "Andrews" CEO Mkt Prod S.P. Fin FIRM #2 "Baldwin" CEO Mkt Prod S.P. Fin FIRM #3 "Chester" CEO Mkt Prod S.P. Fin

FIRM #4 "Digby" CEO Mkt Prod S.P. Fin

FIRM #5 "Erie" CEO Mkt Prod S.P. Fin

FIRM #6 "Ferris" CEO Mkt Prod S.P. Fin

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STRUCTURE (continued) The simulation involves 8 decisions (each representing 1 year) Start date: January 1, 2003

PRINCIPAL FUNCTIONAL AREAS: 1. 2. 3. 4. + + R&D Marketing Production Finance Strategic planning Organization / Administration / Integration (C.E.O.)

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INSTRUCTOR

OFFICE HOURS

Peter Nemetz

ANGUS 352 Mon. & Wed. 2:00-4:00

OR by appointment 822 8443 (office) 224 7386 (fax) e-mail: [email protected]

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STEP ONE

(AFTER LECTURE)

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Form groups

- Sign up on the Comm 492 Bulletin board opposite the south elevator on the 3rd floor in the Angus office wing (Just around the corner from the instructor's office = Angus 352)

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STEP TWO

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Caucus with your fellow firm members

- Notify the instructor of your group members so that you can be assigned a firm # and industry # Note: All firms start with the same history!

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STEP THREE - Read the course outline - Buy course manual from Commerce Print Shop - Read Manual A.S.A.P.

N.B. The price of the manual includes your personal sign-on registration number. You cannot take (or pass) the course without buying the course manual.

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STEP FOUR CAUCUS WITH YOUR FIRM TO CHOOSE STRUCTURE

Suggestions for 5-person firm:

STUDENT # OPTION #1 FUNCTIONAL OPTION #2 PRODUCT OPTION #3 MKT SEGMENT OPTION #4 HYBRID

1 2 3 4 5

CEO Strategic Planning Marketing Finance R&D/Production

Product 1 Product 2 Product 3 Product 4 Product 5

Traditional Low end High end Performance Size

CEO Strategic Planning 4 roles* 4 roles* 4 roles*

PLUS

doubling up: CEO Strategic Planning OR 2 products/person

doubling up: CEO Strategic Planning OR 2 segments/person

the 4 roles: product mgr segment mgr functional mgr competitive intelligence officer

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STEP FIVE COURSE REQUIREMENTS I. Practice Decision To be submitted by computer to the CAPSIM website (www.capsim.com) no later than: 6:00 p.m. on Thursday Sept. 11

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Industry #1 COMM 492A Signon SIMID = C6590 Industry #2 COMM 492B Signon SIMID = C6591 All decision results will be available on the CAPSIM website by 9:00 a.m. the enxt morning After the results of the practice decision, we start anew with the "real" decisions

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CAVEAT: Please double or triple check all decision entries (There can be no reruns)

II. 1st Real Decision: Thursday, September 18

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III.

Written Assignments

DUE DATE

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Statement of goals

SEP. 16

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Statement of organizational Structure

SEP. 16

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1st Annual Report

OCT. 17

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2nd Annual Report

NOV. 14

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Organizational Report

NOV. 28

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IV. Board Meetings

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1st Meeting (2 hours): October 20 -27

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2nd Meeting (2 hours): November 17 - 24

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The Purpose of the meetings with the Executive Committee of the Board of Directors The purpose of the Board Meeting is to evaluate your plans and, if appropriate, give approval to adopt that corporate plan for the coming year. You are seeking a vote of confidence from the Board to proceed with your strategic plans for the future. In part, confidence in your ability will come from the quality of your future plans and in part from your decisionmaking in the past. Some of the key decisions on which you may be seeking approval are your operating strategy as embodied in your pro forma statements, your capital expansion plans and dividend policy.

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WORKLOAD PROFILE

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A Critical Issue: The fundamental challenge facing the organization is the allocation of scarce resources among competing demands. This entails the need for strategic alignment/congruence among functional areas in order to achieve the firm's overall strategic goals. This, in turn, requires:

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Clearly articulated corporate strategy and goals

Clear Organizational Structure (with lines of responsibility)

A Management Information System

An Effective Decision-making System

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STRATEGY

Porter: A diversified company has two levels of strategy: (1) business unit (or competitive) strategy, and (2) corporate (or companywide) strategy. Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.

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In his book, Competitive Strategy, Michael Porter (1980) lists three generic strategies:

1. "COST LEADERSHIP requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising and so on." 2. "DIFFERENTIATION is creating something that is perceived industry wide as unique. Approaches may take many forms: design or brand image, technology, features, customer service, dealer network, or other dimensions. Ideally, the firm differentiates itself along several dimensions. The differentiation strategy does not allow the firm to ignore costs, but rather they are not the strategic target." 3. "FOCUSING on a particular buyer group, segment of the product line, or geographic market; as with differentiation, focus may take many forms. Although the low cost and differentiation strategies are aimed at achieving their objectives industry-wide, the entire focus strategy is built around serving a particular target very well, and each functional policy is developed with this in mind. The strategy rests on the premise that the firm is thus able to serve its narrow strategic target more effectively or efficiently than competitors who are competing more broadly."

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Note: CAPSTONE suggests at least 6 other possible corporate strategies in their overheads: 1. Overall cost leader 2. Cost leader with low-tech focus 3. Cost leader with product life-cycle focus 4. Differentiator 5. Differentiator with high-tech focus 6. Differentiator with product life-cycle focus

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PLANNING AND GOALS: 2-step process FIRST STEP Development of relatively precise, realistic and attainable goals See Table 1

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TABLE 1

Parameters and Time Frame

Possible Goals

Possible Criteria

Year One

Year Two

Year Three, etc.

Growth

$ sales unit sales

$100 million x units

$120 million 1.1 x units

$140 million 1.2 x units

Profitability

$ profits profits/sales

$10 million 0.1

$12 million 0.1

$15 million 0.11

Utilization of resources (efficiency)

ROI ROE

0.15 0.25

0.15 0.26

0.16 0.27

Contribution to owners

Dividends EPS

$1.00/share $2.00/share

$1.10/share $2.40/share

$1.30/share $2.80/share

Contribution to customers

Price Quality Reliability

equal to or better than competition

equal to or better than competition

equal to or better than competition

Contribution to employees

Commission Employment Stability

2% < 5% turnover

2% < 4% turnover

2% < 4% turnover

Source: Adapted form C.W. Hofer, "A Conceptual Scheme for Formulating a Total Business Strategy," (Boston: ICCH, #9-378-726, 1976), p.2.

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IMPORTANT ASPECT: While the choice of absolute values for goals is essential, it is also necessary not to lose sight of your position relative to other firms:

TABLE 2: Example of Aggregation Level and Parameter Type

LEVEL OF AGGREGATION

Firm TYPE OF PARAMETER Absolute Comparative % ROI Rank in net earnings

Product

IRR Product market share rank

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SECOND STEP: Designing and presenting a plan for achieving the firm's stated goals (i.e. How do you get there from here?)

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VARIABLES: UNDER FIRM CONTROL

| OUTSIDE FIRM CONTROL | |

ONLY PARTIALLY CONTROL| LABLE | | | ACTIONS OF COMPETITORS | CREDIT RATING | STOCK PRICE | | | | | | | | | | | | | | | | | | |

MARKETING set prices set promotion budgets set sales budgets input sales forecast

| STATE OF THE ECONOMY | (not an issue in this simulation) | "modest growth | low inflation | reasonable interest rates. | No economic downturns

FINANCE issue/buy-back stock set dividend policy borrow short or long-term pay-down debt

| or other surprises are | expected." | | | |

PRODUCTION schedule production changing plant production capacity change automation levels

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R&D re-position products launch new products set product reliability rating (MTBF)

| | | | | ALTERING PRODUCT CHARACTERISTICS CHANGING PRODUCT MIX ENTERING NEW MARKETS FLEXIBILITY AND CONTINGENCY PLANNING COLLUSION (ILLEGAL)

POSSIBLE TACTICAL AND STRATEGIC RESPONSES

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Note that as in the real world, product demand is driven by numerous factors, including:

· price · performance · reliability · size · age · positioning · consumer awareness · product accessibility

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IMPORTANT NOTES: (1) you will need Microsoft Excel on your computer as decision inputs are entered in 6 Excel spreadsheets. (2) Since this is the first year that we are using this simulation, no special optional modules will be turned on. That is, there are no decisions required in the optional (1) HR, (2) TQM, (3) Labour Negotiations or (4) Advanced Marketing Modules.

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MINIMUM FINANCIAL DATA SET REQUIRED IN REPORT TO BOARD: 1. BALANCE SHEETS · · · · Past Year Current Year Pro Forma (all common size)

2. PROFIT AND LOSS · · · · · Past Year Current Year Pro Forma Current Quarter and Previous 3 quarters (all common size)

3. SOURCES AND USES OF FUNDS

N.B. Marks will be deleted if these data are not presented in the Report to the Board

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SUMMARY

STEP 1: Form a firm STEP 2: Buy the course manual STEP 3: Caucus with your firm STEP 4: Get firm # & Industry # from the instructor STEP 5: Prepare for practice decision due on Thursday, September 11

NOTE:

- There is no midterm exam - There is no final exam - There are no formal classes aside from the 2 board meetings

Good luck!

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HINT: Since this course is focussed on Strategic Management, it may be useful to read one or more summary articles or chapters on the subject. Several recommended readings are:

M.E. Porter, "What is Strategy?" Chapter 2 in Michael E. Porter, On Competition, Harvard Business Review Books, 1998. (reprinted from the Harvard Business Review, November-December 1996.) Other chapters are useful as well. Henry Mintzberg, Bruce Ahlstrand and Joseph Lampel, Strategy Safari: A Guided Tour Through the Wilds of Strategic Managment, The Free Press, 1998, (especially Chapters 1 and 12). Peter N. Nemetz, Lecture notes on Corporate Strategy, on personal webpage: http://pacific.commerce.ubc.ca/nemetz/

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