User Manual 8.3

EXECUTIVE User Manual

EXECUTIVE

A BUSINESS SIMULATION

BASED ON THE MOTOR INDUSTRY

USER MANUAL

Release 8.3

April Training Executive Ltd Tarvin Road, Frodsham, Cheshire, WA6 6XN, UK

Copyright 1991 - 2009. All Rights Reserved


LICENCE AGREEMENT AND LIMITED WARRANTY Please read these terms and conditions carefully before using this system. LICENCE This software product is covered by copyright and all rights are reserved by April Training Executive Ltd, the sole owner of this product. The original purchaser is hereby licensed to use this product on one machine only and is prohibited from copying this product for use on more than one machine simultaneously, without the written agreement of the manufacturer. Copying, duplicating, hiring, selling, transferring or otherwise distributing this product is prohibited by Law, as is the incorporation of the whole or any part of this product in any other software or similar product. This licence shall terminate forthwith if the licensee repudiates the licence or becomes insolvent. LIMITED WARRANTY April Training Executive Ltd warrants that, to the original purchaser only, the media on which the software is recorded is free from defects and if returned within a 90-day period, will be replaced without charge. The software and associated instructional material is sold "as is" without any warranty on its suitability for use. Under no circumstances will April Training Executive Ltd, or any individual involved in the design, development and distribution of this product, be liable for any direct or indirect or consequential damages arising out of the use of this software. COPYRIGHT ON DOCUMENTATION All materials and documents supplied with this product are the copyright of the company. Copying, duplicating or otherwise distributing these materials, without prior permission, is prohibited by Law, as is the incorporation of the whole or any part of this product in any other documents or like product.

EXECUTIVE User Manual CREDITS This simulation was created and designed by :

Julian Critchlow MA(Cantab), MBA Julio Faria BSc(Hons), C.Eng, MIChem.E

Upgrade development by :

Alan Hickman BSC(Hons), MSc

Early development by :

Dr Timothy Auton BA(Cantab), PhD., AFIMA Richard Henfrey BA(Cantab) Robert Marshall MA(Cantab) Dr Richard Oates BSc(Hons), PhD Duncan Peppercorn MA(Cantab) Jeremy Pickard MA(Cantab) Peter Walkley BSc.(Eng) Kate Wardley MA (Cantab) Dr Sebastian Zurek MA(Cantab), PhD Yvonne Woodward MSc James Tryand

Many training managers have provided help and advice in the development of the EXECUTIVE range of simulations, and to them we are very grateful. The Financial Module was originally designed by Duncan Peppercorn with assistance from the staff of the Polytechnic of Wales. The Marketing module was originally developed with advice and support from John Andrews of ICI Central Training. The Operations module was originally developed with advice and support from Edward Handyside at Nissan Motor Manufacturing (UK) Ltd.


CONTENTS Chapter 1 - Introduction ............................................................................................. 7

I Introduction .................................................................................................... 9

The EXECUTIVE Business Simulation.................................................... 9 Background to the Simulation................................................................ 10

II Using this Manual......................................................................................... 14 Chapter 2 - Understanding Marketing ..................................................................... 15

I The Basics of Marketing .............................................................................. 17 What is Marketing ? ............................................................................... 17 What is the Difference Between Sales and Marketing ? ....................... 17 The Marketplace .................................................................................... 17 The Marketing Mix.................................................................................. 18

II Marketing Tools & Techniques ..................................................................... 18

Market Research.................................................................................... 18 SWOT Analysis ...................................................................................... 18 Brand Image........................................................................................... 19 Niche Marketing vs Mass Marketing...................................................... 19 Product Life Cycle .................................................................................. 19 Product Portfolio..................................................................................... 21 Boston Matrix ......................................................................................... 22 Directional Policy Matrix......................................................................... 24 Pricing Strategy...................................................................................... 25

Chapter 3 - Making Decisions .................................................................................. 27

I Marketing Decisions..................................................................................... 29 Introduction ............................................................................................ 29 Market Sectors ....................................................................................... 30 Key Perception Factors.......................................................................... 31 Designs and Options.............................................................................. 32 Research and Development .................................................................. 32 Pricing .................................................................................................... 32 Promotion............................................................................................... 33 Competition ............................................................................................ 34 Market Research and Data on Competition .......................................... 34

II Production Decisions ................................................................................... 35

Introduction ............................................................................................ 35 Car Models............................................................................................. 35 Factory Output/Productivity.................................................................... 36 Purchase and Sale of Factories ............................................................ 37 Automation ............................................................................................. 37 Stock....................................................................................................... 38 Product Quality....................................................................................... 39

III Personnel Decisions .................................................................................... 39

Introduction ............................................................................................ 39 Workforce............................................................................................... 39 Wages .................................................................................................... 40 Training .................................................................................................. 40


IV Financial Decisions ...................................................................................... 40 Introduction ............................................................................................ 40 Financing the Company......................................................................... 41 Loan Repayment.................................................................................... 42 Investments............................................................................................ 43 Depreciation ........................................................................................... 43 Fixed Overheads.................................................................................... 44 Taxation.................................................................................................. 44 Costs and Inflation ................................................................................. 44 Credit and Debt ...................................................................................... 45

Chapter 4 - Input Guide ............................................................................................ 47

I Introduction to the What-If Facility ............................................................... 49 Entering Information............................................................................... 49 Help ........................................................................................................ 49 Viewing Company Reports from Diskette .............................................. 49

II Running the What-If Model .......................................................................... 50 Loading the Diskette .............................................................................. 50 The User System Screen Guide ............................................................ 50

Chapter 5 - Printout Guide ....................................................................................... 69

I The Annual Reports ..................................................................................... 71 Production and Sales Figures................................................................ 71

II Company Accounts ...................................................................................... 74

Profit and Loss Account ......................................................................... 74 Cash Flow Statement............................................................................. 76 Balance Sheet........................................................................................ 77 Financial Indicators ................................................................................ 78

III Car Model Details......................................................................................... 80

Designs Available................................................................................... 80 Options Available ................................................................................... 81 Research and Development Projects .................................................... 82

IV Data on Competition .................................................................................... 82 V Market Research.......................................................................................... 87 VI Share Holding Report .................................................................................. 87 VII Market Perception Report ............................................................................ 87

Chapter 6 - Understanding Company Accounts .................................................... 89

Fixed Assets and Depreciation ............................................................................. 91 Profit and Loss Account ........................................................................................ 92 Cash Flow Statement............................................................................................ 93 Balance Sheet....................................................................................................... 94 Financial Indicators ............................................................................................... 97

Appendix - Decision Forms ..................................................................................... 101 Index ..........................................................................................................................119

Introduction 7

CHAPTER 1

INTRODUCTION

Nothing is so difficult as a beginning, unless perh aps an end

Lord Byron

Introduction 9 I INTRODUCTION 1. The EXECUTIVE Business Simulation EXECUTIVE is an accurate and realistic computer based business simulation that uses real data and models the motor industry. The data used in the simulation has been updated annually since its conception in 1985 and this process is maintained in order to reflect the dynamic nature of this exciting international business and to ensure effective, highly relevant, experiential management and business training. Within the simulation competing teams make business decisions for the operation of companies based on market data and company accounts supplied and on their experience. Decisions are saved to a USB pen/network/internet/diskette, which allows what-if testing of strategies prior to rapid processing on the Master System. Full company annual reports are produced for all teams. The decisions may also be recorded on paper decision forms. The simulation can be expanded by the use of extra modules designed to emphasise and develop particular areas of business. The following modules are currently available for all systems. Financial : Substantially increases the financial training capability of the system by adding a fully interactive financial market, including a stock market on which teams may invest in each other. Marketing : Increases the decisions relating to marketing and promotion in order to emphasise the importance of factors such as customer perception and product promotion in the "marketing mix". Product Life Cycle, Boston Matrix, Directional Policy Matrix and Portfolio Analysis are all included. Operations : Emphasises the importance of factors such as good production planning, training and industrial relations on the quality of the ensuing product. For use of this manual, the tutor will advise trainees of the modes in which the exercise is being run. The general text refers to the simulation being run in core mode only, information relating to the decisions to be made when the FINANCIAL, MARKETING and/or OPERATIONS modes are in operation is printed in boxes of text with a shaded background as illustrated on page 14.

10 EXECUTIVE User Manual

2. Background to the Simulation - The European Moto r Industry This fascinating industry produces perhaps the most important manufactured product of all time. It is the world's largest manufacturing industry. The motor car incorporates style, function and emotion for the individual, and wealth, employment and cash flow across the planet. Innovation and adaptation has been at the forefront of this industry - from the mass production techniques of Henry Ford and Alfred Sloan through to the lean production practices of Eiji Toyoda and Taiichi Ohno in Japan which give us today's high quality products at acceptable prices. The industry is also no stranger to downturns and upturns, with dramatic effects on employees and corporations alike. All these factors combine to provide an excellent basis for the teaching and development of business skills through the powerful medium of simulation. In 1996 the total Western European market size was about 12.1 million cars, it increased to nearly 13.5 million in 1997 and continued to rise annually until 2000, when there was a decrease of 2.2% to 14.7 million. 2001 remained stable but 2002 saw a fall to approximately 14.4 million followed by a further drop to 14.2m in 2003. As the European Union grows with the addition of member states so the market size increases and therefore it is difficult to compare market size for recent years. In 2005 sales amounted to 15.25m which appears higher than in previous years but in real terms reflected a fall of 1%, the market continued to rise in 2006 to 15.82m, remained stable in 2007 and fell by a dramatic 8.8% in 2008 to just over 14.7m. The most significant event with regard to market size is that that the Russian new car market broke through the 2m unit barrier for the first time in 2007, with 2.35m new cars registered it became the fourth largest market in Europe. Mid 2008 the Russian car market was actually poised to replace Germany as the largest single market in Europe, however, the recession hit very hard and in October sales fell dramatically and finally Germany retained its dominant position with Russia climbing to a position of second biggest market with 2.7m sales. Italy marginally squeezed into third place with sales of 21.6m just above the UK in fourth position with a total of 21.3m, followed by France with 20.5m sales and then Spain with the much lower sales figure of 11.6m. Germany has consistently had the largest market over the years but the 3.09m sales achieved in 2008 was lower than the 3.15m unit sales of 2007, representing a 1.8% decrease, and in turn this was a drop of 9.2% on the 3.47m achieved in 2006, following the year on year increase that had been achieved since 2003. In 2008 most countries sales fell even in those countries that saw an increase in 2007. Exceptions where sales actually increased were in Finland, Portugal, Belgium and Luxembourg. VW held its long-standing position as the top selling European car marque in 2008, followed by PSA. Renault-Nissan regained its third position as a result of large drops in sales at Ford (possibly due to the sales of Jaguar and Land Rover). All companies saw a decline in sales with the exception of Mazda who achieved a 1% increase. Toyota suffered the largest decline (-17.2%) after many years successful years of continuous improvement.

Introduction 11

Despite growth in sales for the majority, during the first five years of the decade nearly all companies suffered from decreasing profits. 2005 began a turnaround for a few companies that continued into 2006 and 2007 but 2008 saw profits crashing for most, with the exception of VW who continued to post record results. 2009 is expected to be as disastrous as 2008 but there are hopes of recovery beginning towards the end of the year. The drop in both sales and profits is of major concern to car manufacturers. Some of the measures taken by manufacturers to reduce losses/improve profits have included reducing production, closing plants, both permanently and temporarily, squeezing suppliers, job cuts and the search for new sources of revenue through downstream activities such as finance divisions. Production has been lowered by many of the major companies to reduce a stock problem and in some cases to avoid redundancies by introducing shorter working weeks. Some major players, namely Ford, VW and GM have asked employees to accept long-term wage freezes and in GM's case to impose longer working hours. VW was forced to put a major redundancy programme into effect, Nissan made redundancies in Spain, BMW has threatened job cuts and Ford sold Jaguar and Land Rover. These measures are likely to continue until a balance of supply and demand is restored. The largest area of significant growth over recent years has been the Asian car manufacturers, culminating in Toyota's achievement of becoming the top global car maker in terms of sales in 2006, ending GM's run of 81 years in this position. In 2008 Japanese brands took 14.3% of the European market share (14.6% in 2007, 14.2% in 2006 and 13.5% in 2005), selling 2.1m units. Korean car manufacturers have also had an increasingly important impact on the marketplace since 1998 although levels have stabilized over the past three years. There have been complaints from some US and European manufacturers that the success is due to the Japanese and Koreans keeping their currencies artificially low and are asking for government intervention. However, this is unlikely to be forthcoming given that, unlike their European and American counterparts, Japanese, Korean and more recently Chinese companies are currently investing heavily in Europe, providing locally produced vehicles and valuable sources of employment. Eastern European registrations increased steadily in the mid nineties but then dropped quite dramatically between 1998 and 2003. However, the ten traditionally Eastern European states that joined the EU in 2004 offer a potential new customer base of 76m people and sales have since increased over time. 2008 figures for the region totalled 1.18m units, down from 1.21m units in 2007 which was up from 1.06m units in 2006 and from 900,000 in 2003. Added to this there is the phenomenal success seen in Russia. The marketplace outside of Russia is still relatively small but the competitiveness of the European market makes the area a key target for all car manufacturing companies as it has a much larger potential for growth, with most countries seeing large percentage increases each year. This fact, coupled with the low cost base of the area, is resulting in many manufacturers moving their production facilities to the region.


The European motor industry is the world's largest car market and is also an extremely competitive arena. The following patterns have emerged from this market over the last few years.

1. European car sales, including the new EU member countries, fell by 8.8% to just

over 14.7m in 2008 (16m in 2007). This was a sudden fall in a market that previously saw an increase of nearly 5% between 2005 and 2007 (15.25m in 2005). The last strong rise in sales was in 1998 (14.3m), continuing into 1999, but then falling in 2000 by 2.2% (14.7m), 2001 saw levels similar to 2000 levels but profit margins suffered. In 2002 sales fell by 3%, 2003 saw an increase of nearly 5% but this was a result of an expanding marketplace, in reality there was another fall of 1% when comparing sales in the same EU member countries. However, 2004 saw a genuine 2% increase in registrations, 2005 was stable and there was a substantial 4% rise in 2006. The percentage increase dropped to 1% in 2007 giving a warning sign for the 8% fall of 2008. Profit margins are now also under severe pressure.

2. Selling prices in Europe continue to be under pressure as manufacturers try to

cope with over supply and consumer expectation for pan-European price standardisation. Tax differences across Europe have also been blamed. The battle in the UK between local distributors and direct imports from Europe subsided significantly once UK distributors lowered prices. However, this stabilization initially brought a return to price increases, with average prices throughout Europe rising at a greater rate in 2005 than 2004, with MPVs seeing the largest increases- in line with the fact that this was the only sector sustaining growth at that time. With the high fuel prices of 2007/2008 and increased taxation on larger cars, buyers are shifting towards more fuel efficient cars, dual fuel and even electric cars, which are able to attract better margins. Against this is the general trend to lower prices to attract the reduced number of buyers in the market.

3. The pressure of over supply that followed a difficult economic period in the 1990s

created a series of mergers and takeovers, a move that had proved to be successful for PSA, the long standing partnership that was created in 1975 between Peugeot and Citroen. The mixed fortunes experienced by the companies that were involved has led to a slow-down in similar ventures.

4. Although mergers and takeovers of the big manufacturing companies has

practically come to a standstill (apart from the recent rescue of Chrysler by Fiat), the principal of companies working in alliance is playing an increasing part in car manufacture as companies try to improve profit margins and develop new markets.

The approach is two-fold; the first one is where major manufacturers work together on named projects, sharing research and some production facilities (e.g. shared platforms), mainly still in Europe.

Introduction 13

The second is the formulation of joint ventures with companies in Eastern Europe and the Far East which has benefits for all concerned : the major manufacturers can use the existing production facilities and distribution networks in these countries, enabling them to break into emerging markets, and the local companies profit from the investment made in their companies. The downside for European workers is that in some cases leading manufacturers have moved production of a model from the domestic plant to one in Eastern Europe where overheads are lower, resulting in redundancies in the "Western" European factories.

5. The internet is an extremely effective medium for car promotion with a steadily

increasing level of sales. Although moving slowly, many industry observers still predict major changes in passenger car retailing because of the power and influence of the internet. Major companies continue to make changes in the structure of dealerships in anticipation of further advances and the websites are becoming increasingly sophisticated, allowing potential customers to explore the marketplace from their own homes.

6. The US market has traditionally been more profitable than Europe. However,

increasing penetration by Japanese companies setting up US-based factories ("transplants") has increased competition. US manufacturers are now exporting to Europe. Chrysler has had success overseas with the 300 series.

The argument that an advanced industrial country needs a healthy motor industry to stimulate economic activity in other important parts of the economy is still perfectly valid and is expected to continue into the foreseeable future. The manufacturing industry based around the motor car is thus an intriguing and highly competitive setting, where good decision making can make all the difference between survival and bankruptcy. As such, it provides an excellent basis for teaching and developing the Art and Science of Business Decision Making.


II USING THIS MANUAL This User Manual is designed for teams taking part in the EXECUTIVE business simulation and provides the following information. Chapter 2 - Understanding Marketing : A summary of the key principles and concepts used in marketing. It is designed to introduce participants to marketing theory and it is recommended that this be included in the pre-reading exercise. Chapter 3 - Making Decisions : The main reference when forming strategy; it contains an analysis of all the decisions which must be made, including their implications, benefits and costs. Chapter 4 - The Input Guide : Is relevant to users of the EXECUTIVE what-if model , with or without the additional modules. It explains how to use the what-if model diskette and provides a guide to the software screens. Chapter 5 - Printout Guide : Provides examples of the company reports generated by EXECUTIVE and includes some suggestions on interpreting the information contained therein. When analysing the output we recommend that reference be made to Chapter 6, "Understanding Company Accounts". Chapter 6 - Understanding Company Accounts : A brief guide to how company accounts are constructed. It constitutes an effective guide for participants without financial training. The Appendix : Contains a copy of the decision forms listing all the decisions that must be made by each team for each year/round running their company. References are made in this Manual to Market Research and Cost and Data Sheets. These are supplied in loose leaf format along with this manual. Please ensure you have a full set of these documents or check with the tutor as it may have been decided to make a special charge for them as an option throughout the exercise. The tutor will stipulate if any of the supplementary modules are to be used. In this User Manual, information relating specifically to the modules is marked in the manner of the shaded box below. ADDITIONAL MODULES : Only read the shaded areas if the relating Financial, Marketing and/or Operations module is in operation. When a module(s) is being used any information provided in the shaded boxes superseded conflicting information given in the main sections.

Understanding Marketing 15

CHAPTER 2

UNDERSTANDING MARKETING

Grace is given of God but knowledge is born in the market

Arthur Hugh Clough


I THE BASICS OF MARKETING 1. What Is Marketing ? Marketing is finding out what the customer wants and providing it. It includes processes such as :

Market Research - Finding out what customers want, what competing products are available and their pricing, the size of the market, the profitability, differences between types of customer, advertising methods used and needs not currently satisfied.

Market Segmentation - The needs of every customer are different. Market Segmentation is the process of dividing the customers into groups, or segments, of people with similar needs. Market segments can be based on factors such as demographics, geography, life-style, or on customer preferences and buying patterns.

Product Development - Generating ideas for new products and enhancements to existing products to satisfy the needs and wants of customer types identified in market research.

Marketing Planning - Planning a marketing strategy. Identifying which products to sell to which customers, how to reach those customers, how to retain them and win future business from them.

Sales Strategy - Deciding on target customers, who to target in what order, how to sell to them, how much price can be negotiated.

2. What is the Difference Between Sales and Marketi ng ? The key difference is that sales are a result of marketing. The sales department has direct contact with the customer, it must demonstrate the product, get the order, and keep the customer happy with after-sales service. It must also feed information back to the marketing function from the customer. The marketing rôle plans the products to be developed and who to and when to sell the products, keeps track of competitors and coordinates the management of products across product ranges and markets. 3. The Marketplace Companies operate in a competitive arena known as the marketplace. It consists of people who want to buy a product, known as customers, and people who want to sell products, known as suppliers. The marketplace is where they meet to exchange products for money. The marketplace is subject to many pressures. As an economy expands, more customers will appear wanting more products, as it contracts customers will disappear or delay making purchases as long as possible. New companies and new products appear, old products disappear, as can established companies, through these cycles.


4. The Marketing Mix To win business from the customer, the company must Promote the right Product in the right Place at the right Price. These components of marketing are often combined and referred to as The Marketing Mix, or the four P's :

Product - The goods or service to be sold. It may be a simple "one size fits all", or a product consisting of a common base and then different extensions used to customise it for different customer groups, such as a car, or a product completely customised for each individual, such as a made-to-measure suit.

Place - The groups of customers, or market segments, the product is to be sold to. A product may be aimed at a very specific part of the market (niche marketing), or designed to cover a wide range of the market (mass marketing).

Price - The price the product is to be sold for, with the intention of maximising profit. Pricing may vary for different market segments, depending on the exact product specification and the customers themselves. This also includes pricing strategies, and price can be used as a tool in promotion.

Promotion - The methods used to reach the customers to tell them about the product and persuade them to buy. This includes advertising, sales promotions and sponsorship.

II MARKETING TOOLS & TECHNIQUES Marketing involves many processes and has many tools available to help. The following is a list of the more common with definitions and their uses. 1. Market Research Market Research is the process of collecting information from the marketplace and processing it in order to learn new information or confirm imprecise theories. Common uses of market research are :

� forecasting demand for a new product; � measuring the effectiveness of promotional campaigns; � keeping track of the competition.

Market research is generally undertaken by surveying customers and prospective customers. Questionnaires are completed by telephone interview, face-to-face interview or remotely by post or facsimile. Questions are designed to have simple answers, such as Yes or No, or a choice selected from a list, or a number chosen from a scale. 2. SWOT Analysis An invaluable tool for many tasks is the SWOT analysis. This is the identification of Strengths, Weaknesses, Opportunities and Threats, carried out in a brainstorming session with several people, preferably including people from departments outside marketing. Strengths and Weaknesses are focused inwards, i.e. what are our strengths and weaknesses. Opportunities and Threats relate to external pressures and events, i.e. the opportunities and threats that are present in the marketplace. Having identified all factors, plans can be made to capitalise on strengths and minimise the effect of weaknesses, or eliminate them entirely. Opportunities can be taken advantage of, and threats countered.


3. Brand Image Creating a brand image is a long-term promotional strategy. Its aim is to place the company products firmly in the minds of customers so that they are the first port of call for customers looking to buy. At its most successful, the company is almost irrevocably associated with the product category, for example Hoover with the vacuum cleaner. The brand image is built up over a number of years and very rarely altered once established. For many companies, the brand is their most important asset, representing years of investment. The payback is the brand premium, the virtually automatic assumption by customers that the product is better than the competition. This allows greater margins and/or significantly greater market share than the competition, it can be very difficult to dislodge a well-established brand leader. 4. Niche Marketing vs Mass Marketing A consequence of market segmentation is the decision whether to target a large number of market sectors with a product, or focus very precisely on the needs of a few specialised sectors. There are advantages and disadvantages to both, often the style of the company decides the outcome. To compete in mass markets requires a large scale of operations with consequent high capital requirements. Mass marketing has less scope for product differentiation as the product must appeal to a broad range of customers, and often price is the deciding factor. It usually requires high promotion expenditure. Niche marketing is characterised by a small scale of operation, with the product being tightly tuned to the needs of the target customer. The company usually dominates the niche and only needs a relatively low expenditure on promotion. 5. Product Life Cycle

Introduction Growth Maturity Decline

Sales

Time


Every product has a life cycle, usually following the pattern of the graph above. When a product is introduced, sales are low until it becomes known, then sales increase rapidly during the growth phase. Once the product has become established, sales growth falls and eventually declines as newer products compete more successfully. The total time of a product's life varies from product to product and industry to industry. Life cycles can be as low as a few months for fashion products or up to many years e.g. Cornflakes. The average life cycle for cars is around seven years. Types of Customer

During the life of a product, the type of customer who buys it changes. In the very early stages, customers who are always after the latest technology or trend, known as the innovators, buy the product. They will rarely stay with the product for long as the next new competitive product will attract their attention, however, their custom is needed to attract the next group of customers, the early adopters. During the growth phase of the product life cycle, the early adopters, followed by the majority, buy the product. These customers will only buy once the product has been on the market for a while and other people, such as the innovators, are using it successfully. The early adopters and majority will be retained as customers for longer, as they will only change to a new product when a clear benefit is seen. Finally, once a product has matured and is in decline, the laggards buy. They are generally those who will put off making a decision and wait for the best possible terms. They wait to take advantage of lower prices and high levels of competition for products at the end of their life. Promotion The promotion of a product needs to be changed during its life cycle. Initially, the product has to be promoted to attract the innovators by focusing on the fact that it is a new, innovative and exciting product. Its aim is to persuade the innovators to try out the product and appeal to their sense of adventure and the exclusivity of the product.

M ajo rity La gg ardsEa rlyAd op ters

Innovato rs

P ercen ta ge o fCustom e rsB uyin g Prod uct

Tim e


Once the innovators are using the product, promotion needs to be changed in order to convince the early adopters to buy. It will stress successful use by the innovators and emphasise the reliability of the product. Its aim is to convince the early adopters that the product should be evaluated and subsequently used. Promoting to the majority requires unique features of the product to be emphasised, as there is likely to be competition at this stage. The product will have become established in the market from its use by the innovators and early adopters, however, to gain the large number of sales characterised by sales in the growth phase, the majority of potential customers need to be aware of it. Use of mass-market advertising media is common. Promoting to the laggards often emphasises price or value and the image of the brand. The aim is retain those customers who have used the product for a long time and discourage them from trying out the competition. It often relies heavily on the brand image of the product. 6. Product Portfolio (Profile Analysis)

Companies rarely have only one product, they usually have a range, or portfolio, of products. As the resources available (financial and workforce) to market and sell products is limited, the introduction of products needs to be phased to allow the company to concentrate its efforts on each product in turn. The timing of new product launches has an effect on the performance of the company. If new products are launched too early, they compete with existing products for promotion budgets, time from the sales force and attention from prospective customers. If they are launched too late, the company can suffer cash flow problems as the revenue from existing products declines before revenue from new products grows sufficiently to supersede the old products. Ideally, new products should be launched towards the end of the growth phase of old products, giving them time to grow before revenues fall off from old products and giving the sales force something new to offer customers.

Product 1

Product 2

Product 3

ProfitableGrowth

Sales

Time


7. Boston Matrix

High Market Growth

Star

Wild Cat

Low

Cash Cow

Dog

High Low Relative Market Share

Developed in the 1960's by the Boston Consulting Group for General Electric, the Boston Matrix is a simple diagram to view a portfolio of products at different stages in their life cycle. It is also used to predict cash flow requirements. Each product in the company portfolio is drawn as a circle on the diagram. The area of the circle is made proportional to the sales revenue or profit for the product, thus the larger the circle, the more important the product is to the company. The horizontal position (relative market share) is set to the size of the products' market share divided by the market share of its best competitor. The scale is logarithmic and runs from high to low. The axis is a measure of how dominant the product is relative to its best competitor. If the product has a higher market share, it will be on the left-hand side of the diagram in either the Star or Cash Cow section. If it has a lower market share, it will be on the right hand side, in the Wild Cat or Dog section. The vertical position (market growth) is set to the percentage growth in the market for the product. The scale will vary from industry to industry, the upper and lower limits are determined by the range of products in the company portfolio. For high-technology markets, a low market growth may be 20% and a high growth 50%. For mature industries, low market growth could be negative, high market growth 2%. Each product can be categorised by its position in the matrix and decisions concerning the product can be made based on its position. For the Boston Matrix it is assumed that having a dominant market share is a benefit and gives the company an advantage over its competitors. Production of a product in large volume can lead to economies of scale, thus allowing the company to be able to produce it cheaper than the competition. This allows the company to undercut the competition, and win more customers, or make larger profits on each individual sale, or a combination of both.


Wild Cat Products that do not have dominant market share in a high growth market. They are often new products, or products that were once stars (see below) that have been overtaken by the competition. For a Wild Cat to become a star, investment must be made in promotion and possibly product enhancement in order to attract more customers. Wild Cats are thus net users of cash.

Star Products with a dominant market share in a high growth market. They

are the "hot" products for the company and generate a lot of cash, however they are also heavy users of cash, as the company needs to invest in order to maintain their dominant position. Stars thus have a neutral effect on cash flow.

Cash Cow Products with a dominant market share in a low growth market. Cash

cows generate cash as their sales levels are high compared to the competition, but little investment is needed to maintain their position, as few competitors are likely to want to invest in a low growth market.

Dog Products that do not have a dominant market share in a low growth

market. It is unlikely to be worth investing in a dog as the potential for growth to a more profitable position is limited. Dogs produce little revenue and so are usually cash neutral or a cash drain on the company. They are useful to help absorb fixed costs, thus scrapping a dog product may weaken the positions of other products in the portfolio. Some dog products are also required to support the sales of other products.

Dogs are sometimes sub-divided into cash dogs and doggy dogs. A cash dog can be a net generator of cash if it has only a small competitive disadvantage to the best competitor.

Products typically progress through the sections of the Boston Matrix during their life cycle. When a new product is launched, it will be a Wild Cat. Once in the growth stage the product will become a Star (assuming it wins a dominant market share) and then as the market matures the product will become a cash cow. If the product never achieves a dominant market position, it falls from the Wild Cat section to become a Dog. When the whole product range is plotted onto a Boston Matrix, the competitive position of the company can be seen. A company needs to have a balanced range of products, cash cows to generate capital to invest in Stars and new products in the Wild Cat category. If the company does not have a balanced range, its future will be limited. Too many Wild Cats or Stars can lead to bankruptcy as the investment capital runs out. A company with only Cash Cows will generate cash for a time, but eventually the products will die out and there will be nothing for the future. Note : The definition of the "market" is important when using the Boston Matrix. If the scope of the market is defined too widely, it becomes impossible for a company to achieve a dominant market share and so all products are placed in the Wild Cat or Dog categories. Similarly, when defined too narrowly, all products can become cash cows or stars. In either case, incorrect conclusions will be reached.


8. Directional Policy Matrix

High Market Attractiveness Low

High Low

Business Strengths The Directional Policy Matrix is an enhancement of the ideas behind the Boston Matrix. The Boston Matrix makes the implicit assumptions that market growth is the only factor that makes a market attractive to a company, and market share is the only means of measuring the success of a product. The directional policy matrix generalises these into Market Attractiveness and Business Strengths. For a company to be successful with a product, it needs to be in a market that is attractive and playing to the company's strengths. Products that rate highly in both will be the most successful (the darkest shaded area above), followed by those that are only average in one or the other (the medium shaded area). Products that are not in attractive markets and not using the strengths of the company are unlikely to be viable in the long term. To construct a Directional Policy Matrix, the products are scored on a range of Critical Success Factors for each axis. These scores are then multiplied by the weighting for each factor and added up for all the factors to give the positions on each axis. As with the Boston Matrix, the area of the circle is proportional to the sales revenue or profit of the product.

Market Attractiveness Business Strengths

Market Size Market Growth Profitability Lack of Competition Low Cost of Entry Geography Demographics Subsidies

Patent Protection Distribution Efficiency Low Cost of Funds Market Knowledge Technology Image

Example Critical Success Factors The Critical Success Factors chosen and their relative importance (weightings) need to be considered carefully. Only the most important factors should be used, and generally no more than five factors for each axis.


For example, the table below is an example of calculating the axis position for one dimension of the matrix. Assuming three factors A, B and C with weightings of 6, 3 and 1 out of 10 respectively :

Score 1-10 (Weighted

score)

Factor A Weighting :

6

Factor B Weighting :

3

Factor C Weighting :

1

Total Weighted Score (1-100)

Product X 10 (60) 3 (9) 8 (8) 77 Product Y 1 (6) 5 (15) 10 (10) 31 Product Z 7 (42) 2 (6) 10 (10) 58

For each product : factor pair, the first number is the "score" of the product from 1 to 10 for the factor, the second is the score multiplied by the factor weighting. These weighted scores are then summed for each factor to give a total score out of 100 for the product. 9. Pricing Strategy The aim of pricing is to maximise profitability. Setting a price depend on many factors including :

� Cost � Competitors' Prices � Target return on product investment � How quickly the investment is to be recouped � Price of other products in the portfolio � Value to the customer

Pricing changes during the life of a product. When it is first launched, prices can be high as the target customers (the innovators and early adopters) are not primarily concerned with price. As the product grows and matures, prices will generally fall, both to attract the majority and laggard customers, and to reflect improvements and efficiencies brought about by the economies of scale. This is usually known as a skimming policy. Pricing high on launch can provide quick profits and rapid payback of investment, however the more profitable the market, the more likely new competitors are to enter it. Thus, it may be worth pricing low on launch in order to discourage potential competitors and gain more customers quickly, known as a penetration policy.

Making Decisions 27

CHAPTER 3

MAKING DECISIONS

Experience is the child of thought and thought is the child of action.

Benjamin Disraeli

Making Decisions 29

STRATEGIC SUMMARY EXECUTIVE is a statistically derived model of a real marketplace. It is also fully interactive (i.e. all teams compete with each other in all markets). Hence there are no "right" answers! Success can only be achieved with those skills which you would bring to bear on any other business problem: strategic planning, analysis and imagination. This section provides a guide to the parameters that can be manipulated by the teams to develop a successful business. It is a highly competitive and complex arena and only well planned and responsive business strategies can be expected to produce consistently successful results. As in all business the four key areas of MARKETING, PRODUCTION, PERSONNEL and FINANCE have to be optimised in an integrated manner. Excellence in one area can be negated by poor performance in another. One of the objectives of this simulation is to explore the interaction between these key areas of business to aid the development of these key business skills. I MARKETING DECISIONS 1. Introduction Marketing covers all aspects of the interface between the company and its customers, from the types of cars to be built and what price to charge for them, to how much to spend on advertising and promoting the product. There is a keen element of competition under the control of the computer. This can only be beaten by better products that are well marketed and competitively priced. The other teams in the simulation exercise will also have business strategies that influence yours and provide additional competition. EXECUTIVE follows a trade cycle and, unless informed otherwise in briefing, the current economic climate prevails. A market slump reduces total industry sales considerably, and a boom period can allow profit or sales maximisation. The production team will expect sales forecasts and estimates of future demand. Careful choice of the market "position" is very important. The luxury car market, for instance, can be very profitable but is known to be very susceptible to recession. The medium car market is large in size but necessitates a large scale of operation, a stable workforce and high level of productivity (cars/worker/year); and of course a well designed and marketed car. Finding the right balance at the right time will produce results. In general, increasing advertising and promotion expenditure will increase sales, assuming that :

� the market sectors are large enough to support greater sales; � the increased demand can be met; � the buyers are positively influenced by the promotional methods chosen.

Increasing the number of designs and options will often have a positive effect, although it is most important to offer the correct designs and options on the right models. For example, electric wing mirrors on a Mini would not be a popular option but on a Rolls Royce it would be expected. The most important determinant of sales remains the price level, however an under-priced car could cost dearly.


Research and development projects, which include model revisions, will significantly improve the perceived "value for money" of the car model on which they are implemented; but they are expensive and some take many years to come online. Some will also fail. Again, R&D projects can be more beneficial on some models than on others. 2. Market Sectors (i) The first task of the marketing department, and probably the most important

decision to be made by the company, as many other production and sales decisions will be based on it, is to decide which sectors of the marketplace are to be targeted by the company. There are 16 different sectors and each car model produced must be targeted at one of them. The sectors are categorised by car selling price ranges as follows :

City : up to £14,500; Medium : £12,000-£21,000; Large : £15,000-£45,000; Luxury : £40,000-£100,000+. The super luxury section (e.g. Ferrari, Bentley) is not included. Separate market research about the European car industry provides the size of each sector. The computer will refer to sector numbers only. The table below identifies the categories of cars and buyers and gives the code for each sector (1-16).

Market Sectors - Car Categories

Buyers Age

City (Mini)

Medium (Scenic)

Large (Audi A6)

Luxury (Jaguar XK8)

Under 25 1 2 3 4

25 to 40 5 6 7 8

41 to 55 9 10 11 12

Over 55 13 14 15 16

(ii) Models can at a later stage be re-targeted at a different age group, but cannot be

changed in size. In terms of the table, this means that a model's market position can be shifted vertically but not horizontally. This ability to re-target models allows flagging models to be revitalised and aimed at an age group where the market may be healthier.

(iii) New models can be launched up to a total of five models. Details can be found

in the Car Models section of Production Decisions (page 35). (iv) A decision to compete in the mass market sectors requires high production levels

and productivity (cars/worker/year), a large and stable workforce and/or high investment in automation, significant promotion and a competitive price.

Making Decisions 31

(v) The specialist, luxury sectors are attractive and can be very profitable. Manning levels can be lower although production costs are higher (productivity is lower than for mass produced cars). Problems can occur when the economic trade cycle is in a slump and people are less willing to spend their money, or when there is stiff competition.

(vi) The task facing the car manufacturer was summed up by Alfred P. Sloan of

General Motors several decades ago : "...To meet the challenge of the market place, we must recognise changes in customer needs and desires far enough ahead to have the right products in the right places at the right time and in the right quantity. We must balance trends in preference against the many compromises that are necessary to make a final product that is both reliable and good looking, that performs well and that sells at a competitive price in the necessary volume. We must design, not just the cars we would like to build, but more importantly, the cars that our customers want to buy.". 3. Key Perception Factors (i) Key Perception Factors are used to differentiate the needs of different

customers. Each design and option and each R&D project is "scored" for each of the factors. Customers looking for a car showing strengths in certain factors will look for a car containing a mix of designs and options and R&D projects that add up to the perception they have of their ideal car. The factors are :

Comfort increases the luxury of a car for its driver and passengers, e.g., Leather Seating, Sound Insulation, Electric Windows, Electric Sunroof. Safety increases the chances of survival in an accident and reduces the chances of having an accident in the first place e.g. Air Bags, Seat-Belt Tensioners, Anti-Lock Brakes, Traction Control. Speed is increasing the appeal of the car to those who take pride in extracting the maximum performance from their car, e.g. Large Engine, Alloy Wheels, Wide Tyres, Extra Body Trim. Green minimises the harmful effect the car has on the environment e.g. Economic Fuel Consumption, Recyclable Components, Non-Polluting Fuel Types. Style is the art of making the car different from its peers by careful use of design e.g. Metallic Paint, Alloy Wheels, Convertible. Hi-Tech is packing the car with the latest technical gadgets and state of the art design and manufacture, e.g. Traction Control, 4 Wheel Steering, Aluminium Body Shell.

(ii) It is impossible for a car to excel in all the customer perception factors, some

factors, such as speed and safety, have conflicting demands. (iii) A careful selection of designs and options and R&D projects should be made in

order to convey an "image" for the car model that fits in with the company strategy. A mass market manufacturer will want a broad selection to cover most potential customers, a niche player will concentrate on one or two factors that are critical to its target customers.


MARKETING MODULE : (iv) The car model "Marketing Message" (See Promotion, page 33) should be set to

match the image created by the mix of designs and options and R&D Projects selected. A "Marketing Message" in tune with the product being promoted will lead to enhanced sales.

4. Designs and Options (i) Each design and option has an initial cost that changes for different size vehicles

(see the Cost and Data Sheet for details). (ii) Designs include body shape and engine size and a combination of the two must

be offered to the customer. One or more of each can be offered and one body design and one engine size will be used on every car produced. However, options will only be fitted to a car when requested by the end customer. Only a certain proportion of the buyers of a given model will want a given option on their car (an approximate average is 33%). Therefore, when deciding on the options to make available to customers it is important to select those that will be taken by enough customers to justify the expense of offering them.

5. Research and Development (i) When successful, R&D increases the perceived value for money of the car,

which in turn has a positive effect upon the sales of that model. The effect of the project on sales depends upon the perceived value of that project to the target market.

(ii) The cost of an R&D project is independent of the model for which it is being

developed. Continuous investment in R&D can produce a "Centre of Excellence" which will be more cost effective, leading to savings of up to 25%.

(iii) The duration of projects varies and is divided into Research Time and Model

Development Time. Research time is the time required to develop the technology. Model development time is the time required to engineer the project to "fit" onto the car model.

The research phase of a project need only be carried out once. Once completed successfully on one model, only the development time will be required for other models, the project must be selected for the other models if the new feature is to be available on them. Some projects listed only require development time.

(iv) A project comes online when both the research and the model development are

complete. At this time, the project either succeeds or fails, and expenditure stops. Failed projects may be restarted if the company wants the benefit of that particular R&D project.

(v) R&D "know-how" cannot be transferred between Companies. 6. Pricing (i) The price to be charged for each model should be the average selling price to

the end user, prior to government-imposed taxes such as VAT. It will be the major factor in deciding the perceived value for money of that model, which in turn determines the number of cars sold.

Making Decisions 33

(ii) Pricing is a very important factor to get right : in order to sell well and give a healthy profit, models must be priced higher than their basic production costs, but low enough to make them good value for money. As prices increase above the realistic level, sales decrease rapidly, particularly in the larger market sectors. When calculating production costs, remember that not all customers will require all options.

(iii) Extra low prices also have their pitfalls, the obvious one being reduced revenue

in relation to production costs. However, in some circumstances a "loss-leader" may be considered a good strategy in order to build up market share.

7. Promotion (i) There are seven types of promotion available: Television, Radio, Periodicals and

Reviews, Internet, Dealer Incentives, Promotional Offers and Sponsorship. (ii) These seven categories all have associated costs and effects on sales, generally

in proportion to the amount of expenditure.

Television requires a large budget before any results can be seen. The accumulated sales increase can then be quite significant before saturation occurs. Local Radio advertising is rapidly gaining ground at the expense of television, particularly when targeted at the younger age group, though specialist stations now cater for a wider age and social grouping range and is increasingly allowing this medium to reach a very wide audience. Periodicals and Review advertising is reasonably low in cost, but there is a risk element as a bad review could have a negative impact. Internet is the fastest growing medium for advertising. It accesses a very large number of young to middle aged customers, with the older generation also now taking greater interest in its use. Effective implementation is not inexpensive but when relating fees to the catchment it can be very cost effective. Dealer Incentives are a successful way of boosting sales since the dealers are then working for greater personal gain. This form of promotion is very expensive, but has a good effect on turnover. Promotional Offers can be highly successful and appeal to all age groups and markets, with the exception of the luxury sector. Examples are free insurance, motoring club membership, extended warranty and free air conditioning. Sponsorship provides high tech/high profile advertising, as well as associating the product with success if the sponsored team wins the selected competition. For example, when Peugeot won a rally, sales of the winning model increased by 15%. Sponsorship is no longer limited to motor sporting events, in an attempt to reach a wider audience car manufacturers are now sponsoring events such as tennis tournaments, fashion and art exhibitions, and TV and radio programmes.

(iii) Promotion is automatically distributed between the company's models according to its effect in that market sector.

MARKETING MODULE : (iv) In the marketing module (iii) above does not apply. You must decide how to

distribute the promotion budget across the different promotion types, and across the product range.


(v) For each car model produced, you must choose the "Marketing Message" you

wish to be conveyed to the customer in your promotional activities. For example, you may choose to promote a car as Comfortable and Safe, or as Stylish and Speedy, or as a car good in all aspects. The promotional message is chosen by selecting the percentage of effort to be allocated in promotion to each of the Key Perception Factors. Any percentage may be entered for a factor, so long as the total comes to 100%.

(vi) You may also invest in Corporate Promotion for each of the promotion types.

Corporation promotion is used to back up the model specific promotion by building a consistent Brand Image for the company.

(vii) You may choose to purchase a Market Perception Report for any or all of your

models. This provides feedback from the marketplace concerning the effectiveness of the promotion of the model and details of which options and R&D projects the customer is demanding. The cost of the report is charged under Professional Charges on the Profit & Loss Account and detailed on the Cost and Data Sheet.

(viii) Graphical output is available. Product Life Cycle, Profile Analysis, Boston Matrix

and Directional Policy Matrix graphs are generated by the simulation. Users of the what-if model can view the graphs on their own computers, other users must request the graphs from the tutor.

8. Competition (i) The computer simulates and controls the background marketplace. Each

year/round it calculates the cost competitiveness in each of the 16 market sectors of the external competition.

(ii) Any sector of the market not occupied by any of the teams is automatically

assigned to the computer-simulated external competition. In addition, if any team produces too few of a model, or produces models that are not perceived to be good value for money, those potential sales will be lost to other companies in the exercise or external competition.

9. Market Research and Data on Competition Market Research is available in two forms, pre-printed information on the European car market, and information generated by the simulation. The pre-printed Market Research details the current state of the market and will be out of date once a few rounds of the simulation have been played. The computer generated research is updated each year/round with market predictions and the investments and expenditures made by the competing teams. Data on the Competition is available each year/round and is generated by the master computer. It comprises detailed figures on the other teams and their model specifications. Expenditure on Market Research and Data on Competition is charged to the Profit and Loss Account as "Professional Charges". Their costs are detailed on the Cost and Data Sheet and are inflated annually.

Making Decisions 35

II PRODUCTION DECISIONS 1. Introduction The main production decisions relate to staffing levels and target production for the employees. Production levels must be calculated in conjunction with the sales estimates provided by marketing. Production facilities required are directly dependent on the number of people employed. Under-utilisation of these facilities can increase unit costs substantially. Productivity can be increased by investment in automation and by developing good employee relations. Over-production results in cars being left in stock. This can be very expensive since these cars must be kept up to specification and stored. Strikes may be caused by redundancies or by paying an uncompetitive wage rate. Output will fall and so will productivity. Unit costs will consequently increase significantly. Redundancy payments must be made for any reductions in the workforce. Sometimes the decision may have to be made to run at less than 100% potential output (for example 80% is equivalent to a four day week). This increases unit costs as the workforce is still paid for a full week, but may be necessary in order to clear stock. OPERATIONS MODULE : Production targets must be set for each model. The what-if model will inform you if these targets can be achieved with the workforce and automation allocated, and whether or not overtime manufacturing is required. If high targets are set and the workforce is run on overtime for a prolonged period, product quality may suffer and you may have to consider running at lower productivity levels in order to improve quality standards. You may distribute automation in any proportion to each car model in production.

2. Car Models (i) Each company must produce two models in year one. This can be increased to

a maximum of five models; with only one new model launch per year/round. (ii) Once launched, new models are a long-term commitment that cannot be

eliminated. They can be re-targeted at a different age group, given a facelift and different design features and options; or, alternatively, produced in very small numbers by reducing the workforce to the minimum allowed of 100. This workforce would then be producing spare parts for servicing the cars already on the road.

(iii) Introduction of a new model requires an investment in new product development. The investment must be made in the year/round before production commences. A larger investment increases the chances of the model being successful on introduction to the marketplace. The invested funds will be split equally between R&D and capital investment in production facilities and will appear as such on the Company Report.


3. Factory Output / Productivity Productivity is defined as cars produced per employee in one working year. It takes into account all staff in the company - management, production and service staff.

Cars produced = workforce size x productivity (for the car size) (i) Productivity varies depending on the size of car produced. In general, larger car

models take longer to make and hence are built at lower productivity. Refer to the Cost and Data Sheet for the average productivity you can expect to achieve.

(ii) Productivity is affected by wage rates : low wages can reduce output and even

spark off industrial action; wages above the industry average raise productivity, all other factors remaining constant.

(iii) Reducing the factory output reduces productivity (and pushes up unit costs) as

this simulates a deliberate decision by management to restrict output. For example, 80% is equivalent to a 4-day week.

(iv) Investment in automation is by far the most effective way of improving

productivity. Typical productivity for manufacturers with low automation is in the range 25-30 cars/worker/year. Long-term continuous investment in new technology can push this up to 70-80 cars/worker/year.

The increased output can force workforce reductions, risking the Union's wrath. The advantages of automation should be weighed against the disadvantages and the overall company policy.

OPERATIONS MODULE : (v) Production targets are specified separately for each model. Lower targets will

decrease actual productivity and thus increase costs, but will improve product quality. Higher production targets may require overtime manufacturing (up to an additional 20% production) for which higher wages are paid (150% of standard rate). This can significantly affect product quality.

(vi) Any automation purchased may be shared between the different car models in

any proportion. The percentage of automation required for each model must be stated. The total must equal 100%.

(vii) Investment in skills training will lead to improvement in quality and productivity

over time. Management training will lead to improved industrial relations.

Making Decisions 37

4. Purchase and Sale of Factories A factory can accommodate 4,000 workers. Old factories are sold off and new ones bought automatically as workforce levels fluctuate. The purchase and sale of factories can be recognised on the accounts as a payment or a receipt on the Cash Flow Statement. (i) A new factory is purchased if the total workforce is expanded beyond the nearest

multiple of 4,000. If the workforce is subsequently reduced so that there are too many factories for the total workforce size, the oldest of the company's factories will be sold off.

For example, Company A has three factories, employs 10,000 people and is taking on 2,000 workers. These extra workers can fit into the existing factories and hence none are bought. However, if they were to employ 3,000 workers an extra factory would be purchased as the company would exceed the limit of 4,000 workers per factory.

(ii) The total number of factories does not have to be the same as the number of models being produced. Five models can be produced in one factory, and three models could equally well be made in ten factories. The number of factories depends only on the total workforce.

(iii) The cost of building new factories is not fixed. In EXECUTIVE the new factory

cost rises annually with inflation. (The initial cost appears on the Cost and Data Sheet.)

(iv) Existing factories will be sold off if workers are laid off and the remaining

workforce can be accommodated in fewer factories (i.e. fewer than 4,000 workers per factory).

For example, Company B has a workforce of 10,000 and 3 factories. By laying off 2,000 workers it can now sell a factory and still keep an average factory workforce of 4,000 (8,000/2 = 4,000). On the other hand, laying off only 1,000 workers would not result in a factory being sold (9,000/2 = 4,500).

(v) Selling a factory only realises 60% of its depreciated value. The remainder of the

depreciated value appears as an Extraordinary Loss on the Profit and Loss Account.

5. Automation (i) The minimum effective investment in automation is one unit, the cost of which

increases annually in line with inflation. Refer to the Cost and Data Sheet for the price of one unit in year one.

(ii) Automation is distributed automatically across the models in production the same proportions as the workforce. Equipping one worker with one unit of automation will increase their output by the equivalent of 10 workers.

(iii) It is not possible to replace the entire workforce, as the infrastructural staffing

remains and the automation equipment requires manning. One worker is assigned to a unit of automation. Automation thus allows an increase in output without wage overheads (but at a high capital cost).


(iv) The number of cars produced for a model is the model productivity given on the Cost and Data Sheet (cars per worker per year) times the effective number of workers producing the model.

The effective number of workers for a model is the number of workers assigned to production of that model, plus 10 times the number of units of allocated automation.

For example, 10,000 workers are assigned to build a car with an average model productivity of 33 cars per worker per year. In addition, 200 units of automation are assigned to production of the model. Effective workers = 10,000 + (10 x 200) = 12,000 Cars Built = 33 x 12,000 = 396,000 NB : If more units of automation are assigned to a model than workers, there

will be insufficient staff to keep all the automation running. (v) This investment, as with all fixed assets, depreciates with time (10% p.a. +

inflation) and needs an annual investment to maintain a constant output and ensure productivity benefits. Any investment over and above this will purchase new units and contribute to the effective workforce. Lack of investment in maintenance of automation will see a reduction in production as the effective workforce (workers + working units of automation) is reduced.

6. Stock (i) If a company does not sell all the cars produced, the residue will be "sold into

stock". The Profit and Loss Account will not be charged for the cost of the materials and labour used in producing stock and the vehicles will become a current asset at their production cost.

(ii) In subsequent years EXECUTIVE will always sell cars in stock before it sells the

current year's/round's production. When this happens the stock will cease to be an asset since it has been turned into revenue. Consequently the Profit and Loss will be debited with the value of the stock sold.

(iii) Cars in stock cost money for their upkeep. This is charged as an overhead at

20% of the value of the stock, 12 months in arrears. This upkeep charge serves to keep the stock up to the current product specification.

OPERATIONS MODULE : (vi) Automation is purchased and assigned to specific models as a percentage of

the total available. This will allow the production lines of mass-market cars to be highly automated leaving a luxury or niche car to be predominantly hand built.

As with the workforce, automation can be re-assigned to different models with no penalty or delay.

Making Decisions 39

OPERATIONS MODULE : 7. Product Quality (i) A very large number of factors may affect product quality, including training,

working practices and production targets. (ii) Do not confuse "specification" with quality. A high specification does not imply

high quality. (iii) It takes a long time to gain a reputation for quality in the marketplace: people

have long memories. If a company gains a reputation for bad quality it is not easy to remedy it.

(iv) The lower the product quality, the higher are likely to be the warranty costs on

vehicles which have faults after delivery to the customer. These costs are fully borne by the manufacturer: 2-3% of sales turnover is not uncommon.

III PERSONNEL DECISIONS 1. Introduction The personnel function must work closely with the production function in order to develop a productive and stable workforce. Workers may be recruited at will and at no recruitment cost. The wage rate chosen must be competitive, otherwise poor productivity and strikes are liable to result. Laying people off will have consequences both for the production and financial departments. Small reductions in the workforce can be achieved through "natural wastage", large reductions will provoke strike action. Redundancy payments are always required when the workforce is reduced. Sudden automation of the plant may well cause concern amongst the workforce.

OPERATIONS MODULE : Training may be given to the workforce : about 10% of employees are at "management level". High levels of skills training will improve product quality; management training can help to provide greater worker satisfaction.

2. Workforce (i) In year one the companies can set up their workforce numbers without any

industrial relations complications (minimum workforce per model : 100). (ii) However, from year two onward, changes to the workforce size can have positive

or negative effects on industrial relations, generally in line with the historical behaviour of the industry. A significant reduction in numbers in any one year will initiate strikes, with the days lost increasing with the percentage of the workforce laid off.


(iii) Laying off workers incurs redundancy payments based upon current salaries (see the Cost and Data Sheet for details).

(iv) An acceptable level of absenteeism is 2%. 3. Wages (i) Wages are a major expense and are calculated as follows :

wages = average wage per week x total workforce x complete weeks worked (always round up)

There are 50, five-day weeks in a full working year. (ii) Strikes will obviously reduce the wage bill but a skeleton staff of 10% of the

workforce will always continue to draw wages during strikes. There is an industry-wide minimum wage agreement in force, you may not pay less than this and it rises annually in line with inflation. See the Cost and Data Sheet for details.

OPERATIONS MODULE : (iii) Choosing to use overtime manufacturing to reach production targets will incur

overtime wage payments at "time and a half".

OPERATIONS MODULE : 4. Training (i) Investment in skills training can significantly improve product quality. Workers

are taught technical skills that are specifically relevant to their own jobs. An average investment is 2% of the total wage bill.

(ii) Management training is specifically targeted at the 10-20% of the workforce who

have management responsibility. It can improve product quality directly and by improving worker satisfaction and commitment.

IV FINANCIAL DECISIONS 1. Introduction The finance department is responsible for controlling the expenditure of the company, its debts and its cash. Cash flow projections are essential to the smooth running of the company and will require input from both the production and marketing departments. Unless informed otherwise in briefing, a start up company will be given 5 million £100 shares issued at par, giving them £500 million of share capital.

Making Decisions 41

Cash may be borrowed in order to meet any expected shortfall at reasonable interest rates. Failure to plan ahead in this way may result in the necessity for overdraft facilities to support any cash shortfall. In emergency conditions factories can be closed and the asset realised by the simple expedient of laying off workers. A minimum workforce of 100 staff per model must however be maintained. The factory sale value will be considerably less than its cost price, and indeed less than its value on the company's Balance Sheet. Company tax is charged on the annual profits, payable in the next financial year. Timely investment will reduce tax obligations and help to build a sound, successful company. Losses are carried forward and used to reduce later tax bills. FINANCIAL MODULE : Companies may raise cash either through borrowing, overdrafts or by issuing share equity. The latter will directly affect the share value, and the issue may be under or over subscribed. Companies can invest in gilts, which are offered at a fixed rate of interest, or by buying shares in their competitors. Returns for the latter course of action may be either in the form of dividends, or by making a "killing" as share prices rise on the stock market. 2. Financing the Company (i) The loan requirement facility allows the company to plan for cash flow problems

by setting up the loans at the start of the financial year. Interest on a negotiated loan costs inflation plus 5%.

(ii) A company may have an overdraft of any size. Interest is charged on an

overdraft at the current rate of inflation plus 8 (minimum interest on overdraft is 15%).


FINANCIAL MODULE : (iii) Teams using the what-if model have a credit limit imposed that restricts the size

of their loans to twice the current value of shareholder's funds (i.e. money raised from share issue and retained profit). The interest rate is variable at 3 times the current value of inflation (minimum interest rate is 8%).

(iv) Cash may be raised by issuing shares. At the start of the exercise five million

£100 shares have been issued at face value. Each year/round the company may decide to issue shares in multiples of 1000 at the current share price. The amount issued is limited to a maximum of 10% of issued share capital on any one occasion. Take up of the issue will depend on performance of the company in the next year/round, and movement of the share price. Money raised above the face value of the share (£100) will be allocated to the Share Premium Account on the Balance Sheet. Issuing shares will dilute the equity of the company and may adversely affect the share price. Shares may not be issued when the current share price is below the share face value.

A dividend per sharemay be declared each year/round. This may be calculated

with reference to the profit projections provided by the what-if model, or an estimate of the post-tax profit should be calculated. When the proportion of the profit to be allocated to shareholders has been decided, this figure, divided by the number of shares issued, gives the dividend per share. A dividend declared this year/round will actually be paid next year/round and will become a liability in the meantime.

3. Loan Repayment Loan repayments are automatically made if the closing bank balance is in credit, up to half of the balance is set aside to pay off any outstanding normal loans in the next year/round.

For example, a company ends a year/round with a bank balance of £1600m and an outstanding normal loan of £1400m. As the balance is in credit, £800m is assigned to repaying loans. Let us suppose that in the next year/round the company just breaks even without having taken out a further loan and having paid £800m repay normal loans; it would have a closing balance of £800m with £600m outstanding in normal loans.

FINANCIAL MODULE : Loans are not repaid automatically. You may choose whether to repay loans at any time and the amount of repayment to be made.

Making Decisions 43

4. Investments (i) Cash left in the bank will accrue interest at 1.5% above the current rate of

inflation. FINANCIAL MODULE : (ii) Each year/round the government issues gilts. These must be held for five

years/rounds and pay interest annually at 2.5 times the rate of inflation (minimum 6%) of the year/round when the gilts were issued. At the end of the five year/round period they are automatically redeemed at face value. Gilts become a long-term investment on the Balance Sheet. Gilts have a face value of £100 and must be purchased in multiples of 1000.

(iii) Companies can invest in their competitors' companies by buying shares. Since a

bid for shares will affect the price of the share bid for, bidders are asked to specify the number of shares wanted and the bid price up to which they are prepared to pay. Shares must be bid for in multiples of 1000. The number of shares gained will depend on how many people are bidding for shares, the bid prices and the number of shares available in the market. The maximum number of shares that can be purchased in another company is 10% per annum.

Companies may subsequently decide to sell shares. A minimum selling price must be specified below which the company does not wish to continue selling. The company must also specify the number of shares to be sold. Share investments and gilt investments are valued on the Balance Sheet as a current asset at their purchase price. Any subsequent profit or loss is accounted for on the Profit and Loss Account when the shares are sold.

Substantial share dealings are reported in the News Bulletin.

No trading in shares may take place in the first year/round of operation or in a company that has been nationalised. When a company is taken over, its shares are automatically purchased by the corporate company at their current price.

5. Depreciation

(i) Depreciation is calculated as 10% of the current book value (i.e. depreciated

value) of the company's fixed assets per annum. It will be seen that the book value of fixed assets therefore tends exponentially towards zero, but never reaches it. Fixed assets include factories, automation and 50% of investments in launching a new model.

(ii) It is assumed that factories do not deteriorate in terms of their ability to house the

workforce, but automation must be "topped up" each year/round in order to remain effective.


6. Fixed Overheads (i) Fixed overheads represent the cost of maintaining fixed assets and of servicing

the workforce. (ii) In EXECUTIVE the fixed overheads charge is related to the value of factories

and automation, the size of the wage bill and the production cost. The following is a formula for estimating fixed overheads :

Fixed overheads = 10% x wage bill + 7½% x materials used + 5% x opening book value of fixed assets

7. Taxation Company tax is charged on profits at the rate given on the Cost and Data Sheet. Previous years/rounds losses are used to reduce tax liabilities as follows. (i) If the accumulated profit of the company is less than or equal to its maximum

accumulated profit, no tax is charged. The maximum accumulated profit in year 1 being taken as 0.

(ii) If the accumulated profit is greater than the maximum accumulated profit, tax is

charged on the difference between them. For example, a company makes a profit of £100 million in year 1, followed by a loss of £50 million in year 2, a profit of £20 million in year 3 and a further profit of £40 million is year 4; the following table shows the tax charged over the four years :

Year / Round Pre-Tax Profit Accumulated

Profit

Maximum Accumulated

Profit Tax Rule

Applied

1 100 100 100 35 (ii)

2 -50 50 100 0 (i)

3 20 70 100 0 (i)

4 40 110 110 3.5 (ii)

8. Costs and Inflation (i) All costs are inflated. (ii) Inflation will vary between half and one and a half times the inflation rate entered

by the administrator when the exercise is set up. (iii) The variation of inflation will be in line with a typical economic cycle. Each

year/round you will be provided with an estimate for inflation for the coming year/round. It can be found on the News Bulletin or will be provided by the administrator.

Making Decisions 45

9. Credit and Debt (i) A period of credit must be set. This specifies how many days customers have to

pay for their vehicles after placing the order. Longer credit terms are more appealing to the consumer and many enhance sales.

(ii) The period of debt specifies the credit that the company will demand from its

suppliers. If it is made very long, the suppliers may respond by raising prices by up to 5%.

Both credit and debt periods must be between 0 and 99 days.

Input Guide 47

CHAPTER 4

INPUT GUIDE

Everything should be made as simple as possible, but not simpler

Albert Einstein

Input Guide 49

I INTRODUCTION TO THE WHAT-IF FACILITY The EXECUTIVE what-if system allows teams to enter a set of decisions and view projections of the possible outcome of those decisions. The projections take into account all that has happened in the exercise to date, but cannot include the effect of decisions being made by the other teams. The actual results for each round are only produced when the administrator of the exercise has processed all the teams' decisions on the master system, teams will then be competing against the background marketplace and all the other teams in the exercise. 1. Entering Information The method used for entering data into EXECUTIVE has been kept simple and logical. All actions are performed from menus on the Main Window. Select a menu using the mouse, or by holding down Alt and pressing the underlined letter. In many cases data will be entered. A question will be presented followed by a rectangular edit box; type the response in the edit box where the cursor is flashing. To register the entry, either hit the tab key to move the cursor on to the next question or move to another edit box using the mouse. If a mistake is made or if a decision is to be changed, move the cursor to the appropriate edit box on the screen using the tab or shift+tab keys or the mouse and re-enter the data. To go back to a previous screen hit the Cancel button or the Esc key. To progress through the screens press the OK button. 2. Help There are two different types of Help available in EXECUTIVE : (i) The Help Menu, which can be accessed from the Main Screen by using the

mouse, by pressing Alt+H or the F1 key on the computer. This provides general help, including help on the main screen, windows keystrokes and details of the screens on which data must be entered.

(ii) Each data entry screens contains a Help button which, when pressed, provides

information about the details asked for on the screen. 3. Viewing Company Report from the What-If System After the first round's decisions have been produced by the master system, the last years' company report can be viewed on the screen using the what-if system. This is done by selecting the View|Current Reports from the menu on the Main Screen and selecting the report(s) to be viewed.


II RUNNING THE WHAT-IF MODEL 1. Loading the What-if System The EXECUTIVE what-if system can be run from USB memory pen, by downloading the files from an email sent by the tutor, the hard disk if a network is being used or from disk. � Insert the device storing the what-if files into the appropriate drive/port of the

computer, e.g. USB pen into the g: drive or open the file downloaded from the internet or the appropriate network/hard disk drive. If the what-if system has not been installed on the team computer by the tutor, double click on the SetUpExecutive83SU file and follow the Wizard instructions. Once installed, for ease of use, an Executive What-If icon can be created from Start:All Programs:April:Executive 8.3 What-If. This process need only be carried out once.

� Open the What-If program, either via the newly created icon or from Start:All

Programs:April:Executive 8.3 What-If. � From the Executive screen select File:Open and double click on the .su file. 2. The User System Screen Guide This section takes you through all the screens used to enter data into the EXECUTIVE simulation. The screens are in the same order as in the simulation. MAIN SCREEN

This is the main screen. It contains all available options in the menu at the top plus information on the current situation of the present exercise, the exercise name and the estimated rate of inflation for the next round/year to be played.

Input Guide 51

MAIN SCREEN MENU OPTIONS File

Open This allows the user to open a game other than the one currently displayed, assuming that there is more than one game saved on the what-if disk/pen drive. Temporary Save Decisions This gives teams the facility to temporarily save decisions, leave the simulation and return to them later. However, once further decisions are made it is not possible to revert to the ones that were saved. Load Data File If the tutor has given instructions to use a data file other than the standard one provided, click on File|Load Data File and select the data file to be used.

Save Final Decisions This option should be used for teams to permanently save a set of decisions. They cannot return to that round's decisions once this has been selected. See page 67 for details. Print This option is used to print a company report from the previous round or the cost and data sheet for the current year/round. See page 67 for further details. Report Print Setup Before printing a report the printer to be used and the appropriate settings should be selected using this option. Graphics Print Setup Before printing any graphs the printer to be used and the appropriate settings should be selected using this option. Print Preview Displays the page as it will look if the print facility is used at that point. Exit This option should be used to exit the simulation once the decisions for the round have been saved.


Play Play Round This option should be selected to play a round of the exercise and enter the decisions for that round. Once decisions have been entered a projected result will be given, the decisions can then either be saved or different ones can be entered by returning to the first decision screen (see pages 66 and 67 for further details). Predict This differs from Play|Play Round in that it allows the team to enter information for several future rounds and view a prediction of the results likely to be obtained after each year. To progress from year to year select Play|Pred ict while the projected company report for the current round is displayed on the screen. The decisions cannot be saved from this option, they must be re-entered using the Play|Play Round option. Graphics This option gives the facility to display the graphs that are available, namely Perceptual Map by Sector and Perceptual Map by Company. They plot the relative position of a model(s) on a graph for a chosen pair of Key Perception Factors. There is the option to display a perceptual map for a specific market sector, in which case all the competing models in that sector will be displayed, along with the sector ideal point for the factors chosen, or to display a map for your company, in which case all the company's models will be displayed for the factors chosen. Note : In order to print the graph displayed, it is advised to select Options|Force Mono , to force the graphs to be black and white and make them clearer on the printout. The Option Menu also allows the line width and the font of the text to be altered. File|Graph Print Setup allows the printer to be chosen and File|Print allows the number of copies to be entered before printing. See Page 67 for more details on printing..

Input Guide 53

MARKETING MODULE

Graphics This option allows the user to view the graphs available in the Marketing Module These comprise the following (see Chapter 2: Understanding Marketing). 1. Product Life Cycle -- Plots sales (number of cars sold) over time for an

individual model. Select which of the models to plot the graph for by entering its number when prompted.

2. Profile Analysis - Plots sales (turnover) over time for all models on the same

graph. This enables you to see whether the introduction of new products coincides with the slowdown in the growth of existing products in order to achieve consistent sales growth.

3. Boston Matrix - Positions circles on a graph of market growth against

relative market share for each of your products. The size of the circle is proportional to the sales turnover for the product.

4. Directional Policy Matrix - Positions circles on a graph of Market

Attractiveness against Business Strengths for each of the company's products. The size of the circle is proportional to the sales turnover for the product. The directional policy matrix requires critical success factors to be established for determining the market attractiveness and business strengths. A number of factors may be used for each, and combined by weighting them relative to each other. Those used for EXECUTIVE are as follows.

Score 1 - 2 3 - 6 7 - 10 Business Strengths Factors

Gross Margin < 10% 10% - 20% > 20% Number of R&D Projects < 5 5 - 15 > 15 online or in progress Number of Designs and Options < 5 5 - 15 > 15

Market Attractiveness Factors

Market Growth < -5% -5% to +5% > +5% No. of Home Competitors > 6 6 - 3 < 3 Market Size < 5% 5% to 10% > 10%

Each of the sets of factors for Market Attractiveness and Business Strengths must be weighted by scoring the factors out of 100. The total for each of the sets must be 100. 5. Perceptual Maps - As for core simulation as described before the Marketing

Module shaded box.


Options This menu refers to settings that refer to printing graphs as described in the previous section. Data Edit The menu provides the opportunity to use a data file other than the one currently in effect. It is an alternative method of using the File|Load Data File facility. However, there is unlikely to be more than one data file available during any particular exercise. Reports Print Reports This feature is for the tutor's application only and is not available to teams. View Current Reports This option gives the facility to display and print the company reports and financial results from the previous round. Only results that are available to the team will be accessible. The File|Print option should be used to print any reports as required. Help EXECUTIVE has extensive help throughout. A list of contents can be displayed and details of each subject viewed by clicking on the appropriate subject. A dialogue box showing copyright information and buyer details can also be viewed. Close This option is only available when a graph or report is being viewed. Selecting it takes the user back to the main screen after a graph or report has been viewed.

Input Guide 55

ENTERING DECISIONS When entering decisions a set of screens is presented on which the teams' decisions are to be entered. These screens are laid out in the same order as the pre-printed decision forms provided with the simulation.

What do you wish to call the company ? Enter the name of the company. Model Details Insert names for each model of car in the appropriate box. Sector Enter the code for the market sector at which this model is targeted. Reference market research or the Help screen for more details. Sectors 1 through 16 are permitted, once a car is targeted at a given sector its size cannot subsequently be altered, the system will prevent you from entering a sector corresponding to a different car size. However, the target age group can be changed. Model Price Enter a retail price for each model. This can only be done once the following decisions have been made. The price should not include VAT. Decisions This takes you onto the following screens requesting decisions on the model designs, options and research & development projects and, if using the marketing module, marketing decisions.


Car Model Designs

This screen shows the list of designs available for the model. Designs that have already been selected are checked on the screen. To select the designs to be offered, click on the relevant box with the mouse, or use the arrow keys and press the spacebar when it is highlighted. The box will then be checked. It can be de-selected by clicking on it with the mouse or pressing the spacebar again. All the designs can be selected at one time by clicking on the "(De)Select All" button and responding to the subsequent question by clicking on the "Yes" button. Pressing "No" will de-select all the designs. Proceed to the next screen by selecting the "OK" button. The designs available may differ from those listed here.

Input Guide 57

Car Model Options

Select the options to be offered using the same procedure as described for designs on the previous page. The 'Package' options 26-30 comprise the following : Winter package : heated front seats, headlight washer system, heated windscreen

washer nozzles + dynamic fog lights on luxury models

Styling package : alloy wheels, comfort/sports seats, sport steering wheel, special exterior trim

Security package : Immobiliser, tracker, wheel nut locks

Safety package : Flat tyre indicator, rear side airbags, rain sensor headlight wash, high beam assistant

Luxury package : Leather upholstery, tinted glass, heated seats, advance key Proceed to the next screen by selecting the "OK" button. The options available may differ from those listed here.


Car Model R&D Projects

This screen shows the research and development projects for selection on this model. If a research and development project is already on line (i.e. has succeeded) it will appear checked and grey on the screen. Projects that are already running are checked. Select a project by clicking on it with the mouse, or pressing the spacebar when it is highlighted. It will then be checked. It can be de-selected by clicking on it again. This is referred to as a "toggle". Projects that fail are automatically toggled off, and may be restarted. All projects can be selected at one time by pressing the "(De)Select All" button and responding to the subsequent question by selecting the "Yes" button. Selecting "No" will de-select all the projects. Continue by selecting the "OK" button. The R&D projects available may differ from those listed here.

Input Guide 59

MARKETING MODULE : Car Model Marketing Decisions

Promotion Enter the amount to be spent on each type of promotion for the model. Values entered may include decimal points. A blank is read as zero. These figures relate to one model only, investment in corporate promotion will be made within the Company Decision screens. Key Perception Promotion Effort Enter the percentage of your promotional effort that is to be devoted to getting the message across for each of the key perception factors. Any value from zero to 100% may be entered in each box as long as the total amount to 100%. Purchase a Market Perception Report ? Check the box to purchase a Market Perception Report.


Production and Personnel Decisions

Workforce Enter the workforce size for each model. The minimum allowed is 100, the maximum 99,999. Automation (£m) Enter the amount to invest in any new automation and/or maintenance of existing automation. Investment is optional but if there is no investment then production from any existing automation will be reduced. To maintain existing output levels, a maintenance spend of the depreciation value plus inflation should be made. Any new automation purchased will be added to that which already exists. Factory output (% of maximum) This enables factories to be run at less than full potential output if desired, e.g. to implement a three-day week enter 60%. Maximum is 100%, minimum is 0%. If teams run below full capacity, the workforce is still paid for a full week, leading to an increase in unit costs. Weekly Wage Enter the average weekly wage for employees. The industry-wide minimum is displayed, less than this cannot be paid.

Input Guide 61

OPERATIONS MODULE : Production and Personnel Decisions

Workforce Enter the workforce size for each model. The minimum allowed is 100, the maximum 99,999. Target Production Enter production targets for each model. The master system will accept any positive number, however the what-if model restricts the team in its choice for this decision as follows : What-If Model Only : When all the decisions for this screen have been entered, the what-if model estimates whether the production targets can be either achieved, achieved with overtime or cannot be met. This information is then displayed in a message box. If the target for any model cannot be met, the target must be reduced, or more resources allocated to production of the model. Automation Allocation Enter the percentage of automation (that already owned plus any new investment) to be allocated to each model. This may be from 0 to 100%, however the total for all models must be 100%. Note that if no automation is in place and none has been purchased this round, the figures should be left at zero. Information is given at the bottom of the screen if the company has invested in any automation in previous rounds.


Business Plan for Team

New Automation Enter the amount to invest in new automation equipment. It is optional, but any purchased will be added to that which is already there. Skills Training Budget Enter the total expenditure on technical skills training. Management Training Budget Enter the total expenditure on management training. Remember that only about 10-20% of the employees have management responsibility. Weekly Wage Enter the average weekly wage for employees. The industry-wide minimum for the prevailing year is displayed, less than this cannot be paid. The overtime pay rate will be 150% of the value entered.

Input Guide 63

Promotion Seven options are offered. Figures entered may include decimal points. A blank is read as zero. Investment in new model Enter the amount to invest in new product development. Leave the box blank if a new model is not required for the next round. The average investment is displayed, from half to twice this figure may be invested depending on the size of model to be launched. Do you want to purchase market research ? Check this box to purchase market research. It will be attached to the results printout after the round has been processed. Do you want data on the competitors ? This option is available if more than one team is competing in the exercise. It is attached to the results printout and contains details of the competing teams' companies and model decisions. Loan requirement Enter the amount to be borrowed, or leave the box blank if nothing is to be borrowed.

MARKETING MODULE : Corporate Promotion

Enter the amount to be spent on corporate promotion, i.e. promoting the brand image of the company as opposed to promoting specific products.


Period of credit allowed to customers Enter the number of days the company is prepared to wait for payment from customers (maximum 99 days). Period of debt before suppliers paid Enter the number of days materials suppliers must wait before being paid (maximum 99 days).

Input Guide 65

FINANCIAL MODULE : Financial Decisions

Borrow Enter the amount to borrow for the current year, up to the maximum displayed. This question only appears when the balance is in credit. Payback Enter the amount of the company's outstanding debt to be repaid this year. This decision only appears when there is debt outstanding. Issue how many thousand shares at current price Enter the number of thousands of new shares to issue - the amount is limited to a maximum of 10% of issued share capital on any one occasion. All shares have the same face value but are issued at the current market price (displayed). This decision does not appear if the share price is below the face value of the shares. Dividend per share The dividend to be declared this year, per share. This decision should be based upon predictions of expected post-tax profits. NB : Dividends can only be declared if the balance sheet for the prior year re cords retained profits. Period of credit allowed to customers (days) and Period of debit before suppliers paid (days) As per core module (see previous page).


After selecting OK on the business plan screen, the user what-if disk produces a projection for these decisions in the form of a company report. Projections can be viewed on screen or printed for long-term evaluation prior to saving or re-entering decisions to make changes (see page 67 for printing details). The actual results will only be generated after the decisions have been saved to the user what-if destination and processed in the master system. The decisions will then be compared to those made by the other teams in the exercise and the computer-simulated background market.

OK

FINANCIAL MODULE : Investment Decisions

How much do you wish to invest in gilts ? Five-year gilts are offered each year with a face value of £100, and at a rate of interest specified both in the previous year's News Bulletin and on the screen. Enter the amount to invest in gilts this round. Buy / Sell Shares Shares may be bought and subsequently sold in each of the other competing companies, provided they have not been taken over and there are shares available in that company. The maximum that can be purchased is 10% per annum. The current number of shares owned and the current share prices are displayed for the selected company. To select another company, click on the arrow or use the cursor keys. To buy shares in a company, enter a ̀ B ' in the Buy/Sell entry, the number of shares to be bought in the Quantity entry and the maximum price to pay for those shares in the Price entry. Shares must be bid for at a price higher than the current share price. To sell shares in a company, enter an `S' in the Buy/Sell entry, the number of shares to sell in the Quantity entry and the minimum price to accept for the shares in the Price entry. Shares must be offered for sale at a price lower than the current share price.

Input Guide 67

There is the opportunity to temporarily save a set of decisonsy should the team wish to exit the simulation and return to that set of decisions at a later date by selecting File:Temporary Save . NB : Temporary Save does not provide the facility to make further decisions and then recall the ones that are in Temporary Save.

To replay a round after a projection has been made click on and re-enter decisions. TO SAVE DECISIONS FOR PROCESSING Once the team is happy with the decisions made, display the company report projection on screen and select File|Save Decisions . The disk/pen drive should then be handed to the administrator. If saving to a network or the internet the files will automatically be transferred to the tutor. PRINTING RESULTS 1. EXECUTIVE uses the drivers installed through Windows™ on the computer it is

being run on, so the printing process is the same as for any other Windows program.

2. It is advisable to set up the printer which is to be used as the default printer

through the Windows™ Control Panel* before running EXECUTIVE, although it can be changed from within the program using File|Report Pr int Setup .

3. Ensure that the printer is attached and stays attached during computation and

printout, unless you plan to operate solely from the screen. 4. If the printer is needed by the program and it is not functioning, an error message

will appear on the screen. Check that the printer is attached, is on-ine and has enough paper, and is not displaying any error messages. Also check the printer status in the Control Panel* of Windows™. The program will then return to the position just before the point at which the error was detected. In some cases the part of the printout which was in the printer's "buffer" may still be lost. This is unavoidable, but the information can be reprinted.

5. To print a company report :

i) Display required report :

� For projection of current round the report will be displayed once all decisions have been entered.

� To display the results of the previous round or graphs, go to View and

select Reports|View Current Report or Graphics as required. ii) To print :

Select File|Pr int Enter number of copies required Click on OK

Select to return to decision form screen or File|Ex it to exit the simulation.

* The Control Panel can be found in Start|Settings .

Printout Guide 69

CHAPTER 5

PRINTOUT GUIDE

'Tis strange - but true; for truth is always strang e; stranger than fiction

Lord Byron

Printout Guide 71

I THE ANNUAL REPORTS In EXECUTIVE information is presented as a Company Annual Report, including financial information. A typical example is shown in the following pages. Reference is made to Chapter 6: "Understanding Company Accounts" where relevant. This Chapter illustrates the type of report generated by the master simulation. The what-if model generates similar output : differences are detailed under the relevant headings below. 1. Production and Sales Figures Production Report – Team 1 : Cheshire Motors

Market Sector

Model Name

Produced Cars Sold Cars in Stock

Model Price (£)

Market Share (%)

8 BMW 18945 18094 851 46500.00 1.89

12 Porsche 6315 6315 0 48500.00 0.66

Market Sector

Model Name Workforce

Materials Cost (£)

Design & Options Cost (£)

Labour Cost (£)

Gross Margin

(%)

Produc-tivity

8 BMW 3000 24497.50 12057.36 2643.55 15.70 6.32

12 Porsche 1000 24497.50 15781.83 2643.55 11.50 6.32

Workforce 4000

Strike Days 7

Productivity (cars/worker/year) 6.32

Productivity Index 1.05

Total Market (m) City Medium Large Luxury

Size 4.65 5.19 4.23 0.96

The top of the report records the name of the exercise and the round to which the results relate. The what-if model produces "performance projections" rather than a company report.


1.1 Production and Sales Statistics The company is currently producing two models. The following statistics are shown for each model in production.

Market Sector The name of each model and the sector of the market at which it is currently targeted.

Produced The production of that model in the last year/round, in number of units.

Cars Sold The number of units of the model sold.

Cars in Stock The current number of finished units of this model in stock and unsold.

Model Price The current selling price of this model as decided by the company.

Market Share The percentage of the size group captured by the model.

Workforce The number of workers employed building the car.

Materials Cost The cost of the raw materials used in producing each unit of this model last year/round, not including designs and options.

Designs and Options Cost

The cost of any chosen design features plus the average cost of the options added to each model.

Labour The wage cost of the people building each unit of the model.

Gross Margin

The percentage profit on each unit of the car, not including the cost of overheads. It is calculated as the gross profit on each car divided by the selling price times 100%. The gross profit on each car is the selling price minus the materials, designs and options and labour costs.

Productivity The number of cars of the model built per worker per year.

The following values are produced for the company as a whole.

Workforce The total number of people employed by the company on all its models.

Strike Days The number of days of production lost due to strikes and absenteeism.

Productivity (cars/worker/year)

The total number of cars built by the company, divided by the total workforce.

Productivity Index

Reduces the basic productivity to a common base of one in order to allow easy comparison of productivity across teams. The index is a measure of how hard the workforce is working, with one being the level at the start of the simulation.

Finally, the number of units sold in each of the four size groups sold in the total market is given.

Printout Guide 73

OPERATIONS MODULE :

The following additional information will be provided on the Company Report when the Operations Module is in operation.

Market Sector

Model Name

Target Production

Potential Productivity

car/worker/year


with Overtime

Warranty Cost per Car (£)

8 BMW 6,000 7.50 7.80 599.43

12 Porsche 6,000 7.50 7.80 661.69

Target Production The production target for each model as selected by the team.


The productivity that could be reached for each model when full time working is used.

Potential Productivity with Overtime

The model productivity possible when full overtime is used.

Warranty Cost per Car

The average cost per car of re-work needed due to customer complaints of faults on their cars. This value applies to models sold in the current year/round. As a percentage of sales revenue, it is an indicator of the quality of each product.

1.2 Interpretation If stocks are high and increasing, the company must increase sales or cut production in order to avoid punitive stock upkeep charges. The market share provides a good measure of the relative success of the model even though the market size is fluctuating from one year/round to the next. The productivity index and the days lost to strikes provide an indication of the state of industrial relations in the company compared to the industry at large. The total market sizes plotted over several years/rounds indicate how the total market is changing.


FINANCIAL MODULE : The Profit and Loss account also includes details of investments in and disposal of gilts and shares.

II COMPANY ACCOUNTS Full details of the interpretation of accounts are given in Chapter 6 : Understanding Company Accounts. This section serves as a guide to interpreting the salient features of the accounts. 1. Profit and Loss Account

The Profit and Loss Account shows the difference between sales received and the costs of achieving those sales.

Profit and Loss Account £m – Team 1 : Cheshire Moto rs Sales 5551.63 Cost of Sales * 4197.31

---------- Gross Profit 1354.32 Overheads:

Fixed Overhead 416.24 Promotion 83.00 Research and Development 139.50

Depreciation 60.00 ----------- Operating Profit 655.58

Interest on Current Account 7.50 Interest on Loans 6.00

----------- Pre-Tax Profit (Loss) 657.08 Tax 229.98

======= Post-Tax Profit (Loss) 427.10 ======= * Cost of Sales is calculated as Opening Stock 0.00 plus Materials Cost 4520.97 plus Wages 456.63 less Closing Stock 780.29 ------------ Cost of Sales 4197.31 ------------

Printout Guide 75

1.1 Interpretation A low, or negative Gross Profit shows that cars are being sold for less than their manufacturing cost. The solution must be to increase price, since increasing sales will only serve to make more losses. An Operating Loss can be dealt with either by increasing margins, increasing sales or cutting overheads. An Operating Profit coupled with a Pre-Tax Loss indicates that the company is in a debt crisis and is not generating enough profit to service its loans. Margins must be increased, or overheads cut in order to increase the operating profit. A Pre-Tax Profit can occur with an After-Tax Loss if any extraordinary losses have been made, for example on the sale of a factory. This is not generally considered to be a cause for major concern. Research and Development costs also include 50% of investment for launching a new model. This is a one-off cost which reduces the operating profit for that year/round. "Professional Charges" (where present) include Market Research, Data on the Competition, and use of the what-if model (if charged for). MARKETING MODULE : Professional Charges also include the cost of purchasing Market Perception Reports.

OPERATIONS MODULE : The Profit and Loss account also includes details of factory recalls and warranty. .claims.


2. Cash Flow Statement

The Cash Flow Statement shows the cash that has been received by the company, and the cash that the company has spent. 2.1 Interpretation Negative cash flow (balance before loans less than opening balance) is often combined with a profit on the P&L if significant capital purchases have been made (e.g. automation, factories, launch of a new model). This is often planned and is not a problem. It can also be the result of purchasing materials for cars that subsequently become stock. This is a bad situation and indicates that the company has excess capacity. The stock must be sold, both to generate cash and to reduce the cost of stock upkeep. A negative cash flow requiring loans coupled with chronic losses on the P&L indicates the need for a drastic reappraisal of the company's strategy.

Cash Flow £m – Team 1 : Cheshire Motors Opening Bank Balance 500.00 ----------- Revenue 5551.63 Bank Interest 1.50 Materials Costs 4520.97 Wage Costs 456.63 Total Overheads 638.74 Factory Cost 600.00 ----------- Balance Before Loan -253.21 ----------- New Loan 300.00 ----------- Closing Bank Balance 46.79 =======

Printout Guide 77

3. Balance Sheet

The Balance Sheet shows the situation of the company at the end of the last financial year/round. Read in conjunction with the financial indicators it can tell you a great deal about the financial viability of the company. 3.1 Interpretation In general the Balance Sheet is less helpful in diagnosing problems than are the Profit and Loss Account and Cash Flow Statement since it does not relate to performance during a given period. However, a large outstanding normal loan indicates that a debt crisis may be imminent or already happening (see Profit and Loss above). A large overdraft should always be converted to a loan to reduce interest payments. The current value of stock will indicate how much stock upkeep charges are likely to be next year/round. The Retained Profit of the company is the sum of all the profits (and losses) made by the company over time. 4. Financial Indicators

Balance Sheet £m – Team 1 : Cheshire Motors Fixed Assets

Cost 630.00 Depreciation -63.00 ------------ Book Value 567.00

------------ Current Assets

Stock Value 33.36 Debtors 94.33 Bank Balance / Overdraft 429.70

Current Liabilities: Tax 0.00 Creditors 155.65 Overdraft ----------- Net Current Assets (or Liabilities) 401.74 ----------- Total Assets Less Current Liabilities 968.74 ======= Capital and Reserves

Share Equity 500.00 Retained Profit (Loss) -131.26

------------ Total Shareholders Funds 368.74 ======= Long Term Liabilities

Loan 600.00 ----------- Total Capital Employed 968.74 ======


4.1 Interpretation The outstanding debt should be considered if it is thought that the company may be in a debt crisis. The Current , Quick and Liquidity ratios are measures of the short-term financial viability of the company. They are defined in Chapter 6: Understanding Company Accounts. All three ratios should generally be greater than one for a successful, well planned, established company. The Return on Assets is a measure of the return that might be expected on investment in the company. It is a good way of judging the relative merits of different companies. The Gross Margin shows the average percentage mark up of the price of cars being sold over their manufacturing costs. In the car industry 20% is an acceptable figure. Post-Tax Profit over Sales shows profit as a percentage of sales. It is also sometimes considered to be an indicator of company performance. Profit per Employee shows pre-tax profit divided by workforce. This is another measure of relative performance.

FINANCIAL INDICATORS

Outstanding Debt £m 300.00 Return On Assets 53.01 % Current Ratio 3.61 Gross Margin 24.39 % Quick Ratio 0.16 Post-Tax Profit/Sales 7.58 % Liquidity Ratio 0.16 Profit / Employee (£) 21569.38

Printout Guide 79

FINANCIAL MODULE :

FINANCIAL INDICATORS Return on Shareholders Funds 17.45 % Return on Capital Employed 17.00 % Gross Margin 18.12 % Sales Margin 6.70 % Post-Tax Profit/Sales 4.90 % Profit / Employee (£) 46406 Gearing 0.29 Net Gearing -3.00 Current Ratio 2.66 Quick Ratio 2.66 Liquidity Ratio 2.12 Share Price (£) 282.93 Market Value (£m) 1442.94 Earning Per Share (£) 25.48 PE Ratio 11.10 Dividend / Share (£) 2.00 Dividend Cover 12.74 Interest Cover 8.57 Borrowing Limit (£m) 1189.00 Net Cash (£m) 558.17 Net Capital Employed (£m) 186.33

The Return on Shareholders' Funds and Return on Capital Employed relate to the efficiency of the company in using the funds available to it. The former is a more general indicator, and can be used to compare the prospect of investing in the company with other investments such as the bank, unit trusts or fine art. The latter gives a more specific measure of the efficiency of the company's operations in making a return on the total funds available to the company. The Sales Margin , here expressed as a percentage of turnover, indicates whether the company is making enough of a mark up over the direct (variable) and indirect (fixed) costs to cover those costs. A well-managed company should balance its sources of funds between shareholder's funds and loan capital. The Gearing should be about 0.5: if it is much higher, close to one or even greater than one then the company is raising too much capital through debt. Loans have interest payments that must be made, shareholders can, in extremis, be starved of their dividend. The interest cover is a measure of how many times the company can pay its interest charges, this should be much greater than one. The remaining indicators all relate to the market performance of the company's shares. The Share Price is the price that the market puts on each of the company's issued shares, and the Market Value is the total value that the market puts on the company. If this latter is less than the Total Capital Employed , the company may be the target of an asset stripper. This would be a very unhealthy situation.


The Earnings per Share gives an immediate measure of whether the shares are a good investment at the current market price : the PE Ratio (Price/Earnings) shows how many times greater the current market price is compared to the earnings per share. The Dividend per Share gives to the potential investor an immediate idea of the return that the company makes to its shareholders. The greater the dividend the more appealing the share is likely to be to investors. The dividend cover is a measure of how the company views profits : the higher the value of the cover, the greater the proportion of the profit that is being ploughed back into the company. Overall, financial indicators should never be viewed in isolation, but in relation to those for other companies operating in the same market. III CAR MODEL DETAILS 1. Designs Available The designs and options selected by the company for each model are printed. The models may be examined as a group to check that each is correctly equipped for its target market.

Example printout : Designs Available – Team 1 :Cheshire Motors

MODEL 1 BMW

MODEL 2 Audi

2/4 Door Saloon/Estate yes

3/5 Door Hatch

2/3 Door Coupe yes

4x4

SUV/MPV

Convertible yes yes

Small Engine (4 Cylinder) yes

Large Engine (6-8 Cylinder) yes

Hybrid Engine yes

Diesel Engine yes

Printout Guide 81

2. Options Available Example printout : Options Available – Team 1 : Cheshire Cars

MODEL 1 BMW

MODEL 2 Audi

Multi Location Airbags yes yes

Dual Fuel Operation

Satellite Navigation

Xenon Headlights yes

Alloy Wheels yes yes

Security Tracker yes

Tow Bar

Cruise Control yes yes

Automatic Transmission yes

6-Speed Gearbox yes

Parking Sensors yes yes

Rain Sensing Wipers/Lights yes yes

Speed Limiter yes

Electronic Stability Control yes yes

Panoramic Sunroof yes

Heated Front Seats yes

Run-Flat Tyres

Heated Electric Wing Mirrors yes yes

Electric Adjustable Seats yes

Sun Reflective Screen/Glass yes yes

Air Conditioning yes

Superior Sound System yes yes

Bluetooth Phone Preparation yes yes

TV/DVD Player yes

Metallic Paint yes yes

Winter Package

Styling Package

Security Package yes

Safety Package

Luxury Package yes


3. Research and Development Projects Example printout : Research And Development Projects – Team 1 : Cheshi re Motors

Estimated Year of Completion

MODEL 1 BMW

MODEL 2 Audi

9. Regenerative Brakes 3

15. Drowsiness Detection 2

17. On Board Inernet Online

21. Lower Emissions 3

23. Carbon Fibre Bodywork Online

This summarises the Research and Development Projects for each model. Projects that have succeeded are labelled "online". Some projects will have failed, wasting valuable resources and money. For the remaining projects an estimated completion date is shown (e.g. Carbon Emissions should be online in year 3 if it succeeds). When initially researched each project has a research time and a development time (tutor will have the details of the time division). Once online, the technology can be applied to all other models with only the development time needed to put the project online. In the what-if model projections all projects are assumed to be successful in their envisaged year/round of completion. IV DATA ON COMPETITION Sales Distribution Sales by size group

Team City Medium Large Luxury

1 : Cheshire Motors 12000

1 : Cheshire Motors 62000

2 : Premier Cars 41495*

2 : Premier Cars 6,000

Market Sales 4841683 4670255 4283360 928080

* Models in stock Sales Distribution lists the sales by model of all teams' cars enabling easy comparison of sales figures. It also lists total sales for the background competition in each size category.

Printout Guide 83

Market Distribution Product Price £ / Market Share %

Team City Medium Large Luxury

1 : Cheshire Motors 46000 1.26

1 : Cheshire Motors 19,500 1.43

2 : Premier Cars

2 : Premier Cars 15750 0.88

Market Distribution lists the retail price and market share of all teams' models enabling easy comparison of pricing decisions. Market Sector of Model

Team 1 2 3 4 5

1 : Cheshire Motors 5 11

2 : Premier Cars 5 7

Market sector of model details the actual market sector at which each team's models are aimed. It differs from the market distribution (see above) in that the former only shows the size categories for each car model. Basic Cost of Model

Team 1 2 3 4 5

1 : Cheshire Motors 9766 21555

2 : Premier Cars 10319 21074

Costs gives the total materials costs (raw materials plus designs and options) of all models produced. Production

Team Workforce Productivity Index

Productivity (cars/man/year)

Days Lost to Strikes

Weekly Salary (£)

1 : Cheshire Motors 2000 1.30 44.55 6 355

2 : Premier Cars 2000 1.16 38.75 5 375


OPERATIONS MODULE :

Team Sales /

Employee £

Pre Tax Profit / Employee £

Training Budget /

Employee £

Warranty Cost Per Car £

1 : Cheshire Motors 289068 25365.50 1400.00 204.83

2 : Premier Cars 40900 35198.75 2600.00 239.62

Team Automation Expenditure £m

Total Automation Expenditure £m

1 : Cheshire Motors 50.00 50.00

2 : Premier Cars 60.00 60.00

In addition to the first Production table, the above information is also generated when the Quality Module is in operation, providing training investment details and the ratio of warranty costs per car sold.

Team Sales / Employee £

Pre Tax Profit / Employee £

Automation Expenditure £m

Total Automation Expenditure £m

1 : Cheshire Motors 289068 25365 50.00 50.00

2 : Premier Cars 409200 35198 60.00, 60.00

Production lists the workforce sizes, productivity index, average productivity achieved, days lost to strikes and wages of each competing team. These allow comparison of production efficiency between the teams. Sales per employee and pre-tax profit per employee are given to allow comparison of employee efficiency across teams. Automation investment for the last year/round and accumulated investment are also given.

Printout Guide 85

Promotion Budget

Team Budget (£m)

1 : Cheshire Motors 60.00

2 : Premier Cars 50.00

Promotion Budget lists the total promotion budget for each competing team. FINANCIAL MODULE : Share ownership (thousands of £100 shares) gives full details of who owns whose shares. Each row of the matrix represents the shares held by the company in its competitors. Total shares issued is also detailed.

Research And Development Projects – Team 1 : Notver igud Motors

Estimated year of completion

MODEL 1 BMW

MODEL 2 Audi

12. Lightweight Engine 3

15. Drowsiness Detection 2

21. Carbon Emissions 3

23. Carbon Fibre Bodywork Online

Research and Development Projects lists the projects that are being undertaken for each model and their status in years, i.e. using the table above Drowsiness Detection is being researched for Model 1 and is likely to take two years to complete. Carbon Fibre Bodywork has been researched for Model 2 and is already online. Designs Available – Team 1 : Cheshire Motors

MODEL 1 BMW

MODEL 2 Audi

2/4 Door Saloon/Estate yes

3/5 Door Hatch

2/3 Door Coupe yes

4x4

SUV/MPV

Convertible yes yes

Small Engine (4 Cylinder) yes

Large Engine (6-8 Cylinder) yes

Hybrid Engine yes

Diesel Engine yes

Designs Available lists all the designs that are offered for each model.


OPTIONS AVAILABLE

MODEL 1 BMW

MODEL 2 Audi

Multi Location Airbags yes yes

Dual Fuel Operation

Satellite Navigation

Xenon Headlights yes

Alloy Wheels yes yes

Security Tracker yes

Tow Bar yes

Cruise Control yes yes

Automatic Transmission yes

6-Speed Gearbox yes

Parking Sensors yes yes

Rain Sensing Wipers/Lights yes

Speed Limiter yes

Electronic Stability Control yes yes

Panoramic Sunroof yes

Heated Front Seats yes

Run-Flat Tyres

Heated Electric Wing Mirror yes yes

Electric Adjustable Seats yes

Sun Reflective Screen/Glass yes yes

Air Conditioning yes

Superior Sound System/ipod yes yes

Bluetooth Phone Preparation yes yes

TV/DVD Player yes

Metallic Paint yes yes

Winter Package

Styling Package

Security Package yes

Safety Package

Luxury Package yes

Options Available lists all the options that are offered on each model.

Printout Guide 87

Note that the what-if model does not present Data on the Competition during projections, as competitors' actions are not known. Data on the competition must be requested when entering decisions if it is to be supplied by the master simulation. V MARKET RESEARCH This can be purchased at any time during the simulation. This information will be useful in planning a company's strategy and pricing decisions. The administrator of the exercise can tell you what market research is available.

FINANCIAL MODULE : VI SHARE HOLDING REPORT Full details are provided of any share trading which has been carried out by the company in the current year/round. In particular, this provides details of the prices at which shares held by other teams have been sold, or the average figure at which shares have been purchased. Additionally, details are given of the current market value compared to the purchase value (book value) of all shares held by the company. The difference between the two is the potential profit (or loss) that would be made if the shares were to be sold at their current market value.

MARKETING MODULE : VII MARKET PERCEPTION REPORT Details are given of the take-up of the options made available for the car models, along with the estimated take-up of options not currently available. This enables the marketing function to tune the specification of the product to its target market. Levels of interest in Research and Development projects not currently available on the models are given. This enables the product designers to concentrate on those projects that give the best return for the investment. Product market awareness levels are given for each type of promotion being invested in. This will vary from saturation coverage to zero awareness. Occasionally you may be told that investment in a particular type of promotion is not cost effective. This means that the benefits available from the promotion can never recoup the investment made in it for that model. The expenditure should thus be cut, or more vehicles produced and sold in order to reduce the unit cost of the promotion.

Understanding Company Accounts 89

CHAPTER 6

UNDERSTANDING COMPANY ACCOUNTS

There, that is our secret, go to sleep you will wak e, and remember, and understand

Robert Browning


Considerable information about the performance of a company can be obtained from its financial statements. This section provides an introduction to the interpretation of accounts. Many of the items explained will be found in the simulation. Others have been included for completeness. There are three financial statements included in EXECUTIVE. The Profit and Loss Statement, also known as the P&L account or the Income Statement. This sets out the sales achieved in the period under review, and deducts the costs involved in getting those sales. The result is the profit (or loss) made. The Cash Flow Statement is just like a bank statement, and shows the actual sums of money that flowed into and out of the company in the period under review. Most companies reorganise their Cash Flow Statement to provide a "Source and Application of Funds" statement. The Balance Sheet is a "snapshot" of the company's financial position at the end of the period under review. It shows the company's assets (what it owns) and its liabilities (what it owes). 1. Fixed Assets and Depreciation Before considering the individual accounts there is one concept that needs to be understood : depreciation. When a company buys an item which will be useful to them over a long period of time it is referred to as a fixed or capital asset. Examples are factories, machinery and company cars. The value of such an item will change : cars will decrease in value each year/round; factories may decrease or increase depending on property prices. The amount by which a fixed asset decreases in value in a given period is called depreciation. This amount is charged on the Profit and Loss Account as a fixed cost. Consider an example :

A machine is purchased for £100,000 and has a useful life of ten years, it would seem reasonable to charge £10,000 per year to the P&L account, thus after five years the value of the machine to the company would be £50,000 - the original cost of the machine less the amount by which it has depreciated. This figure is the book value of a fixed asset, and will be discussed again in the section on the Balance Sheet.

Alternatively, if the machine has an unlimited useful life it could be depreciated by, for example, 10% of its book value each year. Hence after one year it would have a book value of £90,000, after two years £81,000, after three years £72,900 and so on. Its book value would tend towards zero, but never reach it, and the depreciation charged to the Profit and Loss Account would be less each year.

In EXECUTIVE there are two types of fixed or capital assets : factories and automation. Both are depreciated in the latter manner : at 10% of their current book value each year/round.


2. Profit and Loss Account The first item on the Profit and Loss Account (also known as the P&L or Income Statement) is the sales. This is the value in pounds of the sales achieved during the period to which the statement relates. From the sales is deducted the cost of sales. These are the costs that are directly related to producing and shipping the product sold. These are variable costs, like materials, labour and shipping, which vary in direct proportion to the number of sales made. It can be difficult to calculate the exact values for the labour and materials that actually went into the sales achieved in the period under review, since stock is often sold and created. Hence a separate calculation is frequently performed, taking the value of opening stock (materials plus labour), adding the labour and materials for the period under review and subtracting the value of closing stock. The result is the cost of sales. This is how cost of sales is calculated in EXECUTIVE; the value of stock is calculated as materials plus labour. In EXECUTIVE all labour costs are considered to be direct variable costs. In many companies much of the wage bill is considered an overhead (see below). When the cost of sales is deducted from the sales the result is the gross profit, or gross margin. If this is negative then the company is effectively making a loss on each product sold, and selling more will not cure the problem! From the gross profit is deducted all the other costs of operating the company during the period covered by the accounts. These are sometimes termed fixed costs; which is rather mysterious since a company that is making a gross profit but a net loss will often start by trying to reduce fixed costs! Fixed costs include all operating overheads (rent, rates, maintenance, electricity and other fixed overheads) and any other costs including stock upkeep, promotion, research and development, sales department costs and professional fees, and depreciation. Once all items other than interest charges/received have been deducted from /added to the gross profit, the result is sometimes termed the operating profit, or profit on activities. The criterion by which one decides whether or not a particular figure should appear on the P&L is "Was the expenditure incurred to produce sales in the period under consideration ?". Hence interest charged and interest received do appear, as do grants which relate directly to the operation of the company in the last period (i.e. grants on work done, not employment grants which appear as a cash injection on the Balance Sheet). Capital purchases (for fixed assets) do not appear, since they do not relate solely to that period of operation, nor do financial injections for the purchase of shares, or loans. Once all the other costs have been taken away from the gross profit, the profit before tax remains. All companies pay tax on any profit made, which varies according to tax legislation. Sometimes it is possible to reduce taxation by carrying forward losses. In EXECUTIVE tax is initially charged at 35%, payable in the next year/round (but charged to the P&L Account in the current year/round). No tax is charged if the company makes a loss.


If the company loses any of its assets (see Balance Sheet below): e.g. it gives away a product, or suffers some loss, then the value of that loss will also be deducted from the P&L Account after tax has been calculated, as an extraordinary loss. Dividends are also deducted from the P&L after tax has been calculated. The after tax profit/loss is the figure that remains after tax has been deducted from the profit. 3. Cash Flow Statement The Cash Flow Statement is undoubtedly the easiest of the financial statements to understand: it is exactly like the bank statements of which we all have everyday experience. It includes all the items for which the company has received or paid cash during the period under consideration. This includes cash spent on fixed assets as well as the items that also appear on the P&L Account. There's nothing strange about it at all; no depreciation or "cost of sales"; so it is informative to consider the differences between the P&L Account and the Cash Flow Statement. If we purchase a fixed asset, all of its cost will appear on the Cash Flow Statement if it is all paid for in the period that the statement covers. This contrasts with the way a fixed asset is charged to the P&L Account over a period of time as depreciation. Secondly, whereas only the cost of sales appears on the P&L Account, all materials costs and wages appear on the Cash Flow Statement. Injections of capital will obviously appear on the Cash Flow Statement e.g. loans and grants, as will all payments that do not relate to the period. If a loss occurs, e.g. a theft or the destruction of a fixed asset, it will not appear on the cash flow unless money is paid out to replace the item. From this it should be evident that a company can be profitable, but may still have a "cash flow crisis" if it is spending money on capital items, or stockpiling materials. Such things may not appear at all as a negative item on the P&L Account but they must still be paid for. In EXECUTIVE teams set the period of credit given to customers and the period of debt allowed to pass before suppliers are paid. When the P&L Account is being assembled, revenue is considered to be all sales invoiced and payments are all goods that have been ordered, regardless of whether actual payment has been received or made. The Balance Sheet shows a value for Debtors, i.e. the amount of money that is owed to the company by customers, and Creditors, i.e. the money the company still owes to suppliers. The Cash Flow Statement only shows money in and out.


4. Balance Sheet The Balance Sheet provides a great deal of information about the viability of the company. It is a "nothing comes from nowhere" statement which shows what the company owns (its assets), how it has been financed, e.g. by retained profit, grants and subsidies, and shareholders' investment (the reserves), and what it owes (its liabilities). The relationship between the Balance Sheet and the other statements is best shown using a simple example :

Bloggs inc. has just started up as a company, with the owner injecting £25,000 of his own money into the company as shareholders' funds, and the bank providing a £25,000 loan at 10% interest per annum. So at the beginning of the year Bloggs inc. had £50,000 in the bank.

Bloggs bought £70,000 worth of materials during the first year of operation, but at the end of the year had contrived to only pay for £50,000 worth. Bloggs spent £25,000 on wages during the year, and £20,000 on all other fixed costs.

Bloggs built 1,400 Bloggmatic Bloggstigators this year, but only sold 980 of them at £100 each, and only 75% of them have been paid for so far.

At the beginning of the year Bloggs paid £30,000 for machinery that is depreciating at 10% per annum.

Consider the cash flow first. What money came in ? 75% of £98,000. … £73,500. What money went out ? £30,000 on machinery, £50,000 on materials (paid for), £25,000 on wages and £20,000 on other fixed costs. In addition, £2,500 was paid in interest to the bank. Bloggs started the year with £50,000 so the Cash Flow Statement looks like this : £ £ Opening Balance

50,000

Cash In :

Sales 73,500 Cash Out :

Capital Items 30,000 Materials 50,000 Wages 25,000 Fixed Costs 20,000 Interest

2,500

Closing Balance

-4,000

A negative bank balance at the end of the year ! That doesn't sound too good, but before we judge Bloggs on its business acumen let's take a look at the P&L Account.


Firstly, the cost of sales can be calculated. In order to do this the closing stock needs to be valued. Bloggs made 1,400 Bloggstigators at a total cost in labour (£25,000) and materials (£70,000) of £95,000. This is £67.86 per machine. Hence the value of the closing stock is £67.86 x 420 = £28,500. £ £ Opening Stock

0

plus Materials Cost

70,000

plus Wages 25,000 less Closing Stock

28,500

equals Cost of Sales

66,500

Sales were £98,000, and the cost of sales was £66,500. Fixed costs and interest are the same as on the Cash Flow Statement. £ £ Sales 98,000 less Cost of Sales 66,500

equals Gross Profit

31,500

less Fixed Costs

20,000

less Interest 2,500 less Depreciation 3,000

equals Profit before Tax

6,000

less Tax at 35%

2,100

equals After-Tax Profit

3,900

A profitable company, with a negative cash flow of £54,000 ! How can this be ? The Balance Sheet explains... The company has a variety of assets : machinery now valued at £27,000. Rather a lot of stock : £28,500 worth in fact and money it is owed : 25% of £98,000. It also has liabilities : £2,100 of tax owed to the government, £25,000 owed to the bank for loans, a £4,000 overdrawn bank balance and £20,000 still owing on materials.


If the Balance Sheet is constructed we can see how the assets less the liabilities equals the reserves of the company : £ £ £ Fixed Assets

Cost 30,000 less Depreciation Paid 3,000 equals Book Value 27,000

Current Assets

Stock 28,500 Debtors 24,500

TOTAL Current Assets 53,000 Current Liabilities

Tax 2,100 Loans 25,000 Overdraft 4,000 Creditors 20,000

TOTAL Current Liabilities 51,100 NET Current Assets 1,900

TOTAL Net Assets

28,900

Shareholders Funds

25,000

Retained Profit 3,900

TOTAL Reserves

28,900

Wonderfully enough, the Balance Sheet balances. Note that assets are split into Fixed and Current. Similarly, liabilities are sometimes split into current (due for payment within one year) and long-term (due for payment after one year). Current assets and liabilities are those which, respectively, can be realised quickly and could be demanded at short notice. In EXECUTIVE, overdrafts are treated as current liabilities, while normal loans are treated as long-term liabilities.


5. Financial Indicators EXECUTIVE provides a number of financial indicators from which to measure the strength of the business. Many institutions use such indicators as a way of deciding how viable the company is. This section covers some of those indicators briefly, and explains their relevance. Definitions Total Reserves = Retained Profit + Subsidies + Share Equity + Share Premium

Account Current Liabilities = Tax + Creditors + Dividend + Overdraft Current Assets = Stock + Debtors + Bank Balance in Credit Net Debt = Normal Loan – Bank Balance* Net Capital Employed = Total Reserves + Net Debt Total Capital Employed = Total Reserves + Normal Loan * If the Bank Balance is negative, Net Debt = Normal Loan - (- Bank Balance) i.e.

Normal Loan + Overdraft. Profit and Loss Account Ratios and Indicators Gross Profit Gross Margin = x 100% Sales Revenue Gross Profit is made after materials and labour costs have been deducted, thus the Gross Margin is a measure of manufacturing profitability. For a company with a Gross Margin of 20%, every £100 of sales contributes £20 to covering overheads and finance charges, the remaining £80 has been spent in buying materials and paying the workforce. Operating Profit Sales Margin = x 100% Sales Revenue Operating Profit is made after all overhead charges have been deducted, thus the Sales Margin is a measure of the operating efficiency of the company. For a company with a 5% Sales Margin, every £100 of sales contributes £5 towards paying finance charges and profit, the remaining £95 has been spent on materials, paying the workforce and overheads. Post-Tax Profit Post-Tax Profit Over Sales = x 100% Sales Revenue Post-Tax Profit over Sales is an overall measure of company profitability after all costs have been deducted. For a company with a 2% Post-Tax Profit over Sales, every £100 of sales has produced £2 of profit, the remaining £98 has been spent on materials, paying the workforce, overheads, interest charges and the tax bill.


Pre-Tax Profit Pre-Tax Profit per Employee =

Total Workforce

Pre-Tax Profit per Employee is a measure of the overall productivity of the workforce. The value is the amount of profit or loss produced per employee. Operating Profit Interest Cover = Loan Interest + Overdraft Interest Interest cover measures the company's ability to meet its interest payments from profits, if this is below or close to one, the company is having trouble meeting its interest payments. It is undefined when the Operating Profit is zero or negative, or when there are no loans outstanding. Balance Sheet Ratios and Indicators

Post-Tax Profit Return on Net Assets = x 100%

Total Net Assets

Return on Assets (ROA) links the Profit and Loss Account and Balance Sheet. It gives profit as a percentage of assets, measuring the return on money invested in the business. It can be used to compare different businesses or different forms of investment. A company's return on assets should be higher than the return on, say, Building Society accounts, to reflect the higher risk in investing in a company. It is undefined when the Total Capital Employed is zero or negative. Post-Tax Profit Return on Shareholders Funds = x 100% Total Reserves Return on Shareholders Funds gives profit as a percentage of the shareholders funds invested in the business to make that profit. It differs from the Return on Assets in that it does class long term debt as an asset for calculating the return i.e. it measures the return on the shareholders money, not all the money available in the business. It is undefined when the Total Reserves are zero or negative Operating Profit Return on Capital Employed = x 100% Total Capital Employed Return on Capital Employed (ROCE) gives Operating Profit as a percentage of the total capital employed in the business, i.e. shareholders funds + loans. It is a measure of the company's ability to generate profit from money invested in the business. It is undefined when the Total Capital Employed is zero or negative.


Current Assets Current Ratio =

Current Liabilities

Current Ratio is a measure of the company's ability to respond to short term demands on cash. If it is less than one (i.e. the Current Assets are less than the Current Liabilities), the company would not be able to pay all its short-term debt without borrowing to do so. A current ratio above one is desirable. It is undefined if either the current assets or current liabilities are zero or negative.

Current Assets - Stock Quick Ratio =

Current Liabilities

Quick Ratio is a more stringent measure than the Current Ratio, as it does not assume that stock can be sold quickly to raise cash to pay off debts. A quick ratio above one means that the company is able to pay off short-term debt from cash. It is not defined when the current assets less stock or the current liabilities are zero or negative.

Bank Balance LiquidityRatio =

Current Liabilities

Liquidity Ratio is a measure of the short-term strength of the company, i.e. its ability to pay off short-term debt. It is undefined if the bank balance or current liabilities are zero or negative. Normal Loan Gearing =

Total Capital Employed

The Balance Sheet shows how much money the company has raised through loans (on which it must pay interest even if it is unprofitable), and how much it has raised through shares (on which it does not have to pay a dividend). The Gearing of a company is the proportion of the capital employed in the business raised through loans (as opposed to share capital and profits re-invested). The higher the gearing, the more the company is reliant on debt, and thus susceptible to interest payment problems (see Interest Cover). A well-managed company will ensure it balances these two main sources of funds. Net Debt Net Gearing =

Net Capital Employed

Net gearing is similar to gearing, however it also includes the bank balance (cash on short-term deposit or short-term overdraft) in its calculation to give the net position of the company's sources of capital.


Stock Market Ratios and Indicators Post-Tax Profit

Earnings per Share (£) = Number of Shares Issued Earnings per Share (EPS) is the profit made per share in the business. As dividends are paid for out of profit, the earnings per share are the dividends that could be paid if all the profits were paid to the shareholders.

Share Price PE Ratio =

Earnings per Share The price to earnings (PE) ratio is the ratio of the current share price to the earning per share. The higher the PE ratio, the higher the share price is in comparison to the profits generated by the company, i.e. the more highly rated the company is by the stock market.

Earnings per Share Dividend Cover =

Dividend per Share Dividend cover is the ratio of the earnings per share to the dividend paid per share. The higher the dividend cover, the more easily the company can pay the dividends to the shareholders. A low dividend cover indicates a company that pays a high proportion of its profits to the shareholders as opposed to re-investing those profits in the business. Dividend cover may be contrasted with Interest Cover as dividend payments are optional, but interest payments are compulsory. Bloggs inc. has the following values for its financial indicators :

Gross Margin = 31,500/98,000 = 0.32 = 32%

Current Ratio = 53,000/51,100 = 1.04

Quick Ratio = 24,500/51,100 = 0.48

Gearing = 25,000/25,000 = 1.00

Return on Assets = 6,000/28,900 = 0.21 = 21% The current ratio is satisfactory, since it is greater than one. But the quick ratio shows cause for concern. The gearing of Bloggs inc. is satisfactory and the return on assets is certainly enough to tempt potential investors, although it is not as high as the return from many large, blue chip companies.

Appendix : Decision Forms 101

APPENDIX : DECISION FORMS


EXECUTIVE Decision Form Standard Module

Exercise Name Team Number Round Company Name (maximum 25 characters)

Model 1

Model 2

Model 3

Model 4

Model 5

Name (maximum 8 characters)

Market Sector (1-16)

Designs Added (1-10) (As many as required)

Options Added (1-30) (As many as required)

Designs Removed (1-10) (As many as required)

Options Removed (1-30) (As many as required)

R&D Started (1-27) (As many as required)

R&D Cancelled (1-27) (As many as required)

Retail Price (£)

Workforce

Automation (£m) Factory Output (%) (maintenance + new) (e.g. 80% = 4 day week) Wage (£/week) Promotional Expenditure (£m) :

Television Radio Periodicals/Reviews Internet Dealer Incentives Promotional Offers Sponsorship


EXECUTIVE Decision Form Standard Module

New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* (* Delete as applicable) New Loan (£m) Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors


EXECUTIVE Decision Form Financial Module


Model 1

Model 2

Model 3

Model 4

Model 5









Retail Price (£)

Workforce

Automation (£m) Factory Output (%) (maintenance + new) (e.g. 80% = 4 day week) Wage (£/week) Promotional Expenditure (£m) :

Television

Radio

Periodicals/Reviews

Internet

Dealer Incentives

Promotional Offers

Sponsorship


EXECUTIVE Decision Form Financial Module

New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* Borrow £m Payback £m Issue thousand £100 shares at current market price Declare dividend of £ per ordinary £100 share

Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors Invest £m in five year, £100 Gilts Company

Buy / Sell (B or S)

Quantity (thousands of shares)

Bid / Sale Price (£ per share)

1

2

3

4

5

6

7

8

9

* Delete as applicable.


EXECUTIVE Decision Form Marketing Module


Model 1

Model 2

Model 3

Model 4

Model 5









Television £m

Radio £m

Periodicals/Reviews £m

Internet £m

Dealer Incentives £m

Promotional Offers £m

Sponsorship £m

Key Perception Factors (must total 100% for each model)

Comfort %

Safety %

Speed %

Green %

Style %

Hi-Tech %

Market Perception Report (Yes or No)

Retail Price (£)

Workforce

Automation (£m) Factory Output (%) (maintenance + new) (e.g. 80% = 4 day week) Wage (£/week)


EXECUTIVE Decision Form Marketing Module

Corporate Promotional Expenditure (£m) :

Television Radio Periodicals/Reviews Internet Dealer Incentives Promotional Offers Sponsorship

New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* (* Delete as applicable) New Loan (£m) Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors


EXECUTIVE Decision Form Operations Module Exercise Name Team Number Round Company Name (maximum 25 characters)

Model 1

Model 2

Model 3

Model 4

Model 5









Retail Price (£)

Workforce

Target Production

Automation Allocation % (must add up to 100% over all models)

Automation (£m) Skills Training £m (maintenance + new) Wage (£/week) Management Training £m Promotional Expenditure (£m) :

Television

Radio

Periodicals/Reviews

Internet

Dealer Incentives

Promotional Offers

Sponsorship


EXECUTIVE Decision Form Operations Module

New Model Investment (£m)

Market Research : Yes / No* Data on Competition : Yes / No*(* Delete as applicable.)

New Loan (£m)

Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors


EXECUTIVE Decision Form Financial and Marketing Modules


Model 1

Model 2

Model 3

Model 4

Model 5









Television £m

Radio £m


Internet £m



Sponsorship £m


Comfort %

Safety %

Speed %

Green %

Style %

Hi-Tech %


Retail Price (£)

Workforce

Automation (£m) Factory Output (%) (maintenance + new) (e.g. 80% = 4 day week) Wage (£/week)


EXECUTIVE Decision Form

Financial and Marketing Modules Corporate Promotional Expenditure (£m) :

Television

Radio

Periodicals/Reviews

Internet

Dealer Incentives

Promotional Offers

Sponsorship

New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* Borrow £m Payback £m Issue thousand £100 shares at current market price Declare dividend of £ per ordinary £100 share Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors Invest £m in five year, £100 Gilts

Company Buy / Sell (B or S)



1

2

3

4

5

6

7

8

9



EXECUTIVE Decision Form Financial and Operations Modules


Model 1

Model 2

Model 3

Model 4

Model 5









Retail Price (£)

Workforce

Target Production

Automation Allocation (must add up to 100% over all models)

Automation (£m) Skills Training £m (maintenance + new) Wage (£/week) Management Training £m Promotional Expenditure (£m) :

Television

Radio

Periodicals/Reviews

Internet

Dealer Incentives

Promotional Offers

Sponsorship


EXECUTIVE Decision Form Financial and Operations Modules

New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* Borrow £m Payback £m Issue thousand £100 shares at current market price Declare dividend of £ per ordinary £100 share

Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors Invest £m in five year, £100 Gilts Company

Buy / Sell (B or S)



1

2

3

4

5

6

7

8

9



EXECUTIVE Decision Form Marketing and Operations Modules


Model

1

Model

2

Model 3

Model

4

Model 5









Television £m

Radio £m


Internet £m



Sponsorship £m

Key Perception Factors (must total 100% for each model) Comfort %

Safety %

Speed %

Green %

Style %

Hi-Tech %


Retail Price (£)

Workforce

Target Production



EXECUTIVE Decision Form Marketing and Operations Modules

Automation (£m) Skills Training £m (maintenance + new) Wage (£/week) Management Training £m Corporate Promotional Expenditure (£m) : Television

Radio

Periodicals/Reviews

Internet

Dealer Incentives

Promotional Offers

Sponsorship

New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* New Loan (£m) Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors * Delete as applicable.


EXECUTIVE Decision Form Financial, Marketing and Operations Modules


Model 1

Model 2

Model 3

Model 4

Model 5









Television £m

Radio £m


Internet £m



Sponsorship £m


Comfort %

Safety %

Speed %

Green %

Style %

Hi-Tech %


Retail Price (£)

Workforce

Target Production


Automation (£m) Skills Training £m (maintenance + new) Wage (£/week) Management Training £m


EXECUTIVE Decision Form Financial, Marketing and Operations Modules

Corporate Promotional Expenditure (£m) :

Television

Radio

Periodicals/Reviews

Internet

Dealer Incentives

Promotional Offers

Sponsorship New Model Investment (£m) Market Research : Yes / No* Data on Competition : Yes / No* Borrow £m Payback £m Issue thousand £100 shares at current market price Declare dividend of £ per ordinary £100 share Period of Credit : Allow days before debtors must pay Period of Debt : Allow days before paying creditors Invest £m in five year, £100 Gilts

Company Buy / Sell (B or S)



1

2

3

4

5

6

7

8

9


Index 119

INDEX

Index 121

INDEX

—A—

Advertising ................20, 33, 59, 63, 85, 87 Assets

Current....................................38, 96, 97 Fixed .................................38, 43, 91, 93

Automation......................36, 37, 39, 60–62

—B—

Balance Sheet ................41, 42, 77, 91, 94 Bank Balance..........................................97 Book Value..................................43, 91, 96 Boston Matrix....................................22, 34 Brand Image ...........................................19

—C—

Car Categories........................................30 Car Model .......................35, 55, 72, 80, 87

Image..................................................31 New...................................30, 35, 43, 63

Cash Flow...........21, 22, 23, 40, 41, 76, 93 Statement .........................37, 76, 91, 93

Company/Annual Report 49, 50, 54, 67, 71 Competition.............................................34

Data On ......................34, 63, 75, 82, 87 Costs...........................................44, 72, 83

Fixed ...................................................92 Credit

Limit ..............................................42, 65 Period .....................................45, 64, 65

Creditors ...........................................45, 93 Current Assets ............................38, 96, 97 Current Ratio ....................................78, 99

—D—

Debt Period.................................45, 64, 65 Debtors .............................................45, 93 Depreciation................................38, 43, 91 Designs.................................32, 72, 80, 85 Directional Policy Matrix....................24, 34 Dividend Cover .....................................100 Dividends ................41, 42, 65, 80, 93, 100

—E—

Earnings per Share.........................80, 100 Exiting the Simulation .............................51 Extraordinary Losses ..................37, 75, 93

—F—

Factories .................................................36 Purchase and Sale .......................37, 41

Factory Output ........................................60 Finance ...................................................41

Start-Up Position.................................40 Financial Indicators...........................78, 97 Fixed Assets .........................38, 43, 91, 93 Fixed Overheads ....................................44

—G—

Gearing .................................................. 99 Gilts .................................................. 41, 43 Graphs ................................................... 52

Printing............................................... 52 Gross Margin ....................... 72, 78, 92, 97 Gross Profit ................................ 75, 92, 97

—H—

Help........................................................ 54

—I—

Inflation .................................................. 44 Interest

Cover ................................................. 98 On Balance in Credit .......................... 43 On Gilts .............................................. 43 On Negotiated Loan........................... 41 On Overdraft ................................ 41, 77 Payments ........................................... 77

Investment ....................................... 43, 63

—K—

Key Perception Factors........ 31, 34, 52, 59

—L—

Liabilities Current ......................................... 42, 96 Long-Term ......................................... 96

Licence Agreement .................................. 3 Liquidity Ratio................................... 78, 99 Loans ......................................... 41, 63, 65

Repayment................................... 42, 65

—M—

Market Distribution ......................................... 83 Perception Report ............ 34, 59, 75, 87 Research.................... 18, 34, 63, 75, 87 Sectors................. 19, 30, 34, 55, 72, 83 Share ..................................... 19, 22, 33 Value.................................................. 87

Marketing Definition ............................................ 17 Message ...................................... 32, 59

Mass Market ........................ 18, 19, 30, 32

—N—

New Model ........................... 30, 35, 43, 63 News Bulletin ................................... 43, 44 Niche Market........................ 18, 19, 31, 32


—O—

Operating Loss .......................................75 Operating Profit...........................75, 92, 97 Options ...........................32, 57, 72, 81, 86 Overdraft.....................................41, 77, 96 Overheads ..................................38, 44, 75 Overtime .....................................36, 40, 62

—P—

PE Ratio..........................................80, 100 Personnel....................................39, 60, 61 Post-Tax Profit ..................................78, 97 Pre-Tax Loss...........................................75 Pre-Tax Profit ....................................75, 92 Pre-Tax Profit Per Employee ..................98 Price................................19, 25, 33, 55, 83 Printing

Company/Annual Reports...................67 Graphs ................................................52 Projections ..........................................67 Results of Previous Round .................67

Product Life Cycle.................19, 22, 23, 34 Product Quality .................................39, 40 Production.............................35, 60, 61, 84

Statistics .......................................71, 72 Targets....................................35, 36, 61

Productivity .................................36, 38, 72 Professional Charges .......................35, 75 Profile Analysis..................................21, 34 Profit and Loss Account .37, 38, 43, 74, 91,

92 Profit per Employee ................................78 Projections

Viewing ...............................................66 Promotion ...........20, 33, 59, 62, 63, 85, 87

Corporate................................34, 62, 63

—Q—

Quick Ratio .......................................78, 99

—R—

Redundancy......................................35, 40 Research & Development....32, 58, 75, 82,

85, 87 Reserves...........................................94, 98 Retained Profit ........................................77

Return On Assets .......................................... 78, 98 Capital Employed ............................... 98 Shareholders' Funds .......................... 98

—S—

Sales .......................................... 72, 92, 93 Costs.................................................. 92 Distribution ......................................... 82 Margin ................................................ 97 Revenue........................... 38, 91, 92, 93 Statistics....................................... 71, 72

Saving Decisions.................................... 67 Shares

Dividend per Share ................ 42, 65, 80 Face Value......................................... 42 Issue ...................................... 42, 65, 85 Premium Account............................... 42 Price............................................. 42, 43 Purchase and Sale....................... 43, 87

Stock .............................. 38, 72, 73, 76, 77 Strikes ........................................ 39, 40, 72 SWOT Analysis ...................................... 18

—T—

Tax ....................................... 41, 44, 92, 93 Total Capital Employed .......................... 98 Trade Cycle...................................... 29, 31 Training ................................ 36, 39, 40, 62

—V—

Value for Money ............................... 30, 33 VAT................................................... 33, 55 Viewing Previous Round's Results......... 54

—W—

Wages.................................. 36, 40, 60, 62 Overtime ................................ 36, 40, 62

Warranty Costs ................................ 39, 73 What-If

Charges ............................................. 75 Loading a New Data File.................... 51 Playing a Round................................. 52 Predicting Future Results................... 52 Running.............................................. 50 Saving Decisions.......................... 51, 67 Temporary Save ................................ 67

Workforce ...................... 37, 39, 60, 61, 72

Documents

User Manual 8.3