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Decision-making Guide
Copyright 2007 cesim@cesim.com
Decision-making Guide
Table of Contents
1. About Cesim ................................................................................................................. 1 1.1. General ............................................................................................................. 1 1.2. Cesim products ................................................................................................... 1 1.3. Contact Cesim .................................................................................................... 1 2. Decision making guide ................................................................................................... 2 3. Introduction .................................................................................................................. 3 3.1. On-line Helper .................................................................................................... 3 3.2. Students home page ............................................................................................. 4 3.3. Company and operations ...................................................................................... 5 3.3.1. Company ................................................................................................. 5 3.3.2. Market Areas and Segments ........................................................................ 5 3.3.3. Products .................................................................................................. 5 3.3.4. Distribution Channels ................................................................................ 6 3.4. Demand ............................................................................................................. 6 3.4.1. Total Market Demand ................................................................................ 6 3.4.2. Companies market shares .......................................................................... 6 3.5. Winning criteria .................................................................................................. 6 4. Decision making process ................................................................................................. 8 4.1. Decision making pages ......................................................................................... 8 4.2. Decision Checklist ............................................................................................... 8 4.3. Decision making flow .......................................................................................... 9 4.4. Practical advice ................................................................................................. 10 5. Decision making sections .............................................................................................. 11 5.1. Market Outlook ................................................................................................. 11 5.2. Products ........................................................................................................... 11 5.2.1. Product portfolio ..................................................................................... 12 5.2.2. Product upgrade ...................................................................................... 12 5.2.3. Design .................................................................................................. 13 5.2.4. Additional features .................................................................................. 13 5.2.5. Compactness and battery life ..................................................................... 14 5.2.6. Capability usage ..................................................................................... 14 5.3. Markets ........................................................................................................... 15 5.3.1. Europe and Asia ..................................................................................... 15 5.3.2. Customer care ........................................................................................ 17 5.4. Research and development .................................................................................. 18 5.5. Financial data ................................................................................................... 19 5.6. Market reports .................................................................................................. 20 6. Results ....................................................................................................................... 21 6.1. Navigation ........................................................................................................ 21 6.2. Summary ......................................................................................................... 22 6.3. Market research reports ...................................................................................... 22 6.4. Income statements ............................................................................................. 23 6.4.1. Product sales .......................................................................................... 23 6.4.2. Repairs sales .......................................................................................... 23 6.4.3. Variable costs ......................................................................................... 23 6.4.4. Administration ........................................................................................ 24 6.4.5. Production line costs ................................................................................ 24 6.4.6. Advertising ............................................................................................ 24 6.4.7. Channel investments ................................................................................ 24 6.4.8. Warranty ............................................................................................... 24 6.4.9. Investment in repair quality ....................................................................... 25
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6.4.10. Research and development ...................................................................... 6.4.11. Marketing research ................................................................................ 6.4.12. Operating profit ..................................................................................... 6.4.13. Interest income ..................................................................................... 6.4.14. Interest expenses ................................................................................... 6.4.15. Direct Income taxes ............................................................................... 6.4.16. Profit for the round ................................................................................ 6.5. Balance Sheet ................................................................................................... 6.5.1. Accounts receivable ................................................................................. 6.5.2. Cash and cash equivalents ........................................................................ 6.5.3. Share capital .......................................................................................... 6.5.4. Profit .................................................................................................... 6.5.5. Loans .................................................................................................... 6.5.6. Accounts payable .................................................................................... 6.5.7. Further information .................................................................................
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About Cesim
Introduction
Chapter 3. Introduction
This section introduces the On-line Helper and home page of the decision making interface. In addition, it discusses the basic information about the company and markets, as well as the factors affecting the demand.
3.3.3. Products
The company is able to offer 0-6 differentiated products in both markets, Europe and Asia. PDAs have a variety of attributes, i.e. the levels of compactness and battery life, desing, and additional features. With every product, the team is able to decide whether it will be sold in Europe, in Asia, or in both markets.
If a product is sold in both markets concurrently, economies of scale that are achieved will be reflected in a somewhat lower unit cost. On the other hand, some compromises might have to be made because of different sensitivities to product attributes between segments in Europe and Asia.
3.4. Demand
3.4.1. Total Market Demand
The total market size is dependent on the following four factors. Market growth rates Average price level in the market Average level of advertising Number of differentiated products available The possibility of a single company to affect a market's total demand is minimal compared to the possibility to affect their own market share.
affected by the level of earnings. The detailed calculation of share price is based on discounted cash flow valuation. In addition to earnings, other important determinants of the share price are R & D activities and the capability of the management team. Reasonable R & D investments are a signal of favourable growth in the future. The management's capability is assessed by the long-term performance, that is, the ability to make sensible decisions in different situations. Therefore, all the rounds have an impact on the share price. Moreover, the distribution of sales between the segments and markets has a slight effect on the share price. Strong position in segments or market areas that grow rapidly is accounted positively. However, markets associated with significant growth potential tend to be riskier because of several uncertainties. To some degree, the share price is also affected by the marketing communication. Advertising has a long-term effect on the success as it increases markets' awareness of your products. Similarly, channel investments improve teams' channel coverage in the long run. Thus, investors tend to favor companies with proper long-term expenditure on marketing communication.
1. The decisions are entered in the white cells (B). Most of the decisions, like price and advertising, are essential to make in every round, while some like product characteristics and payment period can be left untouched in some rounds depending, of course, on the chosen strategy. 2. In the grey cells (A), you are expected to enter estimates of how the market will develop, what your market shares are going to be, and so on. The estimates affect your decision making because they form the basis of budgeting shown in the system. 3. With certain decisions, where there are specific options to choose from, various menus are used (C). You are able to use these menus by just clicking on a specified area.
Decision Checklist contains your and your team members decisions, as well as your team's decisions. Team's decisions are used to calculate the results for each round. Therefore, remember to check that your team's decisions are what you want them to be before the round deadlines. A. Your decisions. Your personal decision making account is presented here.
B. Teams decisions. This part of the page displays the decision set that is currently saved as your teams decisions. This set of decisions is used in the calculation of results if you do not make any adjustments before the next deadline. C. Team members decision making accounts. By clicking Go, you are able to visit your team members decision making accounts. This function is useful because it allows you to easily review or even edit the decisions of your team members. However, remember that all the adjustments made to your team members accounts are automatically saved to the system. D. Save the decisions. By clicking Save, you are able to select the corresponding decision set to be your teams decisions. You can select a new decision set to be your teams decisions as many times as necessary during every decision making round.
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Please, note that all the information presented on this page is based on forecasts for the year but, in general, the details tend to be accurate. The market size is impossible to forecast accurately as several factors in the markets are also affected by companies' actions.
5.2. Products
Product attributes are one of the most important determinants of the demand. Decisions regarding the product portfolio are, however, challenging because different customer segments appreciate product attributes in different ways. By clicking Prodcuts tab, you are able to access a page that contains all the decisions about product attributes.
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5.2.3. Design
The design does not affect costs. However, design has an important role in product differentiation as the tastes of customer segments differ from each other. Therefore, review the results carefully after each round and try to figure out the latest trends. You are able to decide between the following three alternatives. Classic Avant Garde Sport The decision is made by clicking the Design tabs.
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Capability usage indicator and a figure between 0 % and 100 % show the current level of capability implementation as a proportion of theoretical maximum. If the capability usage index is close to 100 and you want to add a new feature, you have to decrease the battery life or compactness in order to be able to implement new features. Alternatively, you might have to remove certain additional features. The system calculates the capability usage index continuously and does not allow for decisions that would result in unachievable capability usage.
5.3. Markets
After designing a product portfolio, it is recommended to continue with the marketing communication strategy. By clicking Markets tab, you are able to access the marketing communication and pricing decisions. Decisions regarding Europe, Asia, and customer care are made on separate sheets.
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1. Pricing. The company is able to set the prices for all its products in both market areas. Therefore, the same product can be sold at different price in Europe and Asia. Price sensitivities are different in different markets and segments. 2. Sales forecast. Sales forecast is actually an estimate rather than an actual decision. Sales forecast is especially important for budgeting purposes. The more accurately you are able to estimate the actual demand, the better is your standpoint for making the other decisions. In addition to the role of an estimate, the sales forecast has a slight effect on products unit cost. This is attributable to the fact that the sales forecasts are also a basis for the order made to the production company. Naturally, the production company adjusts their production to match the demand. However, the more the actual demand differs from the forecasted market size, the more the unit cost increases as a result of last minute adjustments. 3. Advertising. The company sets a budget for its advertising for every market, product and segment. A part of advertising set to a segment will always spill to other segments. Advertising is a type of pull marketing directly aimed at end customers. Advertising expenditure has a long-term effect on demand. When making advertising decisions, you should look at the sales margin that you are expected to generate for the product in a specific market. 4. Channel investments. Channel investments are allocated between the three available distribution channels in case of every product. Specialty stores Household appliance stores Department stores Channel investments are an example of push marketing, being directed at the distribution channels to achieve a broader store coverage and a higher selling motivation. Comparable to advertising, also channel investments have a long-term impact on demand. 16
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The players should be able to estimate the impact of a longer warranty period, decrease in investment into repair quality etc. when estimating the future demand for repairs. Total market size estimates (on the right hand graph) are always calculated as total nr of teams multiplied by the base demand. Depending on the pricing etc. decisions in relation to other teams, the actual proportion of demand for a given team will vary. If every team had similar decisions, the demand for one team would be equal to the total market demand divided by the nr of teams.
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In addition to this periods R&D investments, the competence indices are affected by the following three factors. Company specific competence indices in the previous period. development results in improvements gradually. Therefore, the year-on-year increase in competence indices is somewhat limited and, to large extent, the competencies in the previous period dictate this periods index levels. The average competence level in the markets. It is always less costly to develop competence that already exists in the market than to develop something that does not yet exist. Research and development investments are very strategic in nature and it is difficult to apply any exact investment calculation method. Even at best, the calculations include heavy assumptions and uncertainties. However, at least when considering R&D investments, you should think the amount of products that you have to sell in order to recover the money that was spend on the development. You should always plan your research and development investments carefully. It is easy to lose substantial amounts of money with careless research and development expenditure.
In addition to financial information, the collection policy is decided in this part of the decision making tool. The decision is made on the Balance Sheet page. The decided term of payment is applicable to all customer segments and market areas. The decision is made in days using the cell next to the budgeted
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balance sheet. A longer collection period has a small positive effect on demand but, at the same time, it also increases the amount of accounts receivable.
Segment reports provide information about forecasted sales and margins in case of each segment in both markets. The first four pages named after segments show detailed information about the margins and sales you have forecasted. Total sales estimates, advertising expenditure and margin estimates are presented. You are able to make comparisons to the previous period, since the actual sales in the previous period are shown, as well. All Segments page shows a summary of all the necessary information. The last market report, Sales Forecast , enables you to review the distribution of forecasted sales between different channgels. The presented margins are based on your sales forecasts, pricing decisions and unit cost estimates. Furthermore, the total sales of a product are divided for each distribution channel according to customer segments' long-term average purchasing behavior. Therefore, since various short-term market factors affect the customers' channel choices, the presented figures are only rough estimates.
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Results
Chapter 6. Results
This part of the guide focuses on explaining the most important content of various result reports. The following presentation is divided into paragraphs according to the report structure. Of course, new results become available after the decision making deadline for a round.
6.1. Navigation
Navigation between different reports and rounds is explained below. In addition to navigation, this section provides you with information about different result formats. A. Drop menus. In addition to the latest results, you are able to review the older ones, as well. The navigation between different rounds is done by using the drop menus which are placed just below the main menu. B. Download. By clicking Download , you are able to save the results as an Excel file. This is a very useful function if you want to print the results or perform further analysis. C. Chart presentation. To view the most important aspects regarding the results as a presentation of several slides, click Show Charts. D. Graphs. In addition to numeric data, the most important items are also presented graphically. Graphs can be activated by clicking Graph icons next to the row headings. Data in graphs is very easy-to-understand and therefore, it is highly recommended to view the graphs.
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6.2. Summary
A set of financial highlights has been selected to give the participants a quick overview of the performance. The calculation of financial ratios is based on the following well-known equations.
Summary provides the participants with information about companies competence indices. As discussed above, investments in research and development affect the competence indices with a delay of one period. Therefore, both last rounds and next rounds competence indices are shown.
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A. Products. Use the check boxes to activate or hide products. B. Title bar. The buttons in the title bar minimize and maximize the customization tool.
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In addition, companies incur costs related to repairs. As discussed above, repairs are outsourced to the production company of the group. These outsourcing costs are directly shown as variable costs.
6.4.4. Administration
Presence in a market area creates fixed administration costs, a constant amount per market area. Furthermore, additional fixed costs depend on the number of products offered in a market, a constant amount for each product. In short, the more products you offer in a market area, the more administration costs you incur.
6.4.6. Advertising
Advertising expenditure is completely under the management's control through decisions. The amount spent on advertising should be in line with the sales volume and the product contribution margin. A useful rule-of-thumb is, for example, the following. Advertising budget = Unit margin before advertising x Total unit sales x Estimated advertising elasticity In general, advertising elasticity ranges between 0.1 and 0.3 depending on segment and market area. Therefore a reasonable amount spent on advertising should be, on average, 10-30 % of products contribution margin. Nevertheless, also alternative strategies might result in favourable results depending on the market development. For example, successful companies might have chosen an aggressive strategy and use relatively large investment-like advertising efforts when launching new products. This helps to create a positive product image to customers, and has a long-term effect. Despite the long-term impact, all advertising expenses are expensed during the period when the investment is made.
6.4.8. Warranty
Extended warranty results in repairs and product replacements during the warranty period because all the products cannot be flawless. Please, note that companies have a certain product liability based on national laws and international conventions and as a result, even with no extended warranty, companies are expected to incur some warranty costs. Depending on the length of warranty period offered in the past, previous rounds sales affect the warranty costs. The warranty costs are generally insignificant compared to the total costs from core operations and therefore, the company has decided not to make any provisions based on the expected future warranty costs, and expenses only costs realized during the current round.
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6.5.4. Profit
Profit is simply the bottom line in the same period's income statement. High profit, in turn, is a sign of short-term profitability.
6.5.5. Loans
The system will automatically raise loans to sustain the liquidity and strengthen the financial position if cash inflows from operations are weak. Naturally, these liabilities are interest-bearing.
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