Copyright 2006 Ernest R. Cadotte Introduction to Strategy and Business Policy.

Copyright 2006 Ernest R. Cadotte

Introduction

to

Strategy and Business Policy


Learning Strategy

I listen, I forget.

I see, I remember.

I do, I understand.

Old Chinese Proverb


Learning Strategy

Computer simulations are a form of combative

training where participants pit their entrepreneurial

business skills against those of formidable

opponents under the watchful eye of a training

coach.


When we study one discipline at a time, we are like a bunch of blind people trying

to understand what an elephant is.

Please tell me

what it is?It’s a snake.

It’s atree trunk.

It’s a sheetof rawhide.

It’s a steeltube.


With business simulations, you can crawl all over and under the new venture to help you to see and understand the whole thing.

It is anenterprise!

Accounting

Production

MarketingDistribution

Finance

HumanResources


Team of Experts Helped to Design a Very Realistic Learning Environment

• Harry Bruce – leadership, governance

• Joyce Russell – team work, human resources

• Jim Reeve – accounting, profit analysis

• Sarah Gardial & Bob Woodruff – customer value

• Jim Wansley – finance

• Dominique Garval – business strategy

• Ernie Cadotte – marketing

• Ken Gilbert – production processes

• Ivan Slimak – brand design, quality processes

• Tom Mentzer – supply chain


Learning Strategy:Learn by Doing

• Participants learn about all aspects of strategic

planning by managing a simulated new business

venture.

• The Marketplace scenario follows the lifecycle of

a new product.

• Business decisions are introduced as they become

relevant in the evolution of the product and

company.


Mental Discipline &Business Culture

• Live and breathe strategic planning and management in a rapidly changing environment.

• Develop leadership, teamwork and interpersonal skills.

• Promote better decision making by learning to manage a totally integrated company, including the management of sales outlets, marketing, production, and human and financial resources.



• Crystallize the financial implications of

business decisions and how they flow to

bottom-line performance.

• Facilitate learning of important business concepts, principles and ways of thinking.



• Discover how important it is to use market data and competitive signals to adjust the strategic plan and more tightly focus business tactics.

• Build business confidence through knowledge and experience.


How is the business simulation conducted?

• Teams are placed in a entrepreneurial scenario - starting up and running a new business venture.

• The opposition is played out by competing teams.


Business Team Market

Opponent

Opponent

Opponent

Objective is to profitably capture a dominant market position


Business Teams

Each team member

assumes a tactical area of

responsibility.

•Marketing•Finance•Distribution•Production•Overall Leadership


How conducted?

• Business team receives information on current situation.

• Current situation is evaluated, strategy formulated and tactics set in placed.

• Tactical decisions are fed into the Marketplace simulator, along with decisions of opponents.

• Results of decisions are fed back to business team.


How conducted?

• The business team can acquire information on what is happening in the marketplace:

– customer reaction to market decisions

– competitor actions

• Current situation is evaluated, strategy formulated, and tactics set in place.

• Tactical decisions are again fed into the Marketplace simulator.


Game Scenario

• You and your business partners have decided to

enter the international microcomputer industry.

• The microcomputer industry is in its

introductory stage of the product life cycle.

• Several other international new venture firms

are entering the market at the same time.


What are the pros and cons of each sales

channel?

You can setup an international Web Center for e-commerce, and/or four international

sales offices.


Market Segments(Market Structure)

Price

Performance

WorkHorse

Traveler

Mercedes


Chronology of Events

• Q1: Organize the team, name the company,

analyze market information, establish strategic

direction and set up shop (design brands, open

a sales office and/or an international web

center and build a factory).



• Q2: Test-market brands, prices, ad copy, media

campaigns, sales staffing and internet tactics.

Determine compensation package for employees

and production schedule for each brand.

• Q3: Study end user feedback, competitive

tactics, employee productivity, factory

operations, and financial performance and make

adjustments to strategy and tactics.



• Q4: Perform a comprehensive strategic

analysis and prepare a business plan. Present

strategic analysis, business plan and financial

request to venture capitalists.

• Q4 – Q6: Initiate international roll-out

campaign.



• Q7: Prepare report to the Board regarding – performance since presentation of Business Plan – deviations from plan– justification for departures– strategic analysis of current situation– plan for future


Equity Financing (Q1-Q3)

• The initial capitalization is 4,000,000 which is being

invested by the executive team over the first 3 quarters,

2,000,000 in Q1 and 1,000,000 Q2 and Q3.

• The executive team owns 100% of the company.

• Forty thousand shares of stock will be issued to the

executive team in exchange for their 4,000,000.

• The initial stock value is 100 per share.


Equity Financing (Q4)

• At the start of quarter 4, the executive team will have the

opportunity to request up to 4,000,000 from venture capitalists.

• The venture capitalists will expect a strategic plan for the next

three quarters in business, including

– strategic analysis of the current situation,

– strategy (goals, priorities, and strategic thrusts),

– tactical plan (geographic expansion, R&D, plant expansion, etc.) and

– pro forma financial statements through Quarter 6


Debt Financing (Q4 and beyond)

• The bank will extend a line of credit to the executive team equal to one and a half times the firm's equity position in the previous quarter.

• The bank is highly risk adverse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.


Special Financing Needs

• The bank is intolerant of poor financial management.

• If a firm ends a quarter with a negative cash position, the bank will contact a loan shark by the name of Guido to obtain an emergency loan to cover the firm's checking account.


Guido’s Financing Terms

• Guido requires repayment in the next quarter • The emergency loan interest rate is a sliding scale which

begins at 10% per quarter and may go as high as 25% per quarter.

• For each 100 which Guido places in your checking account, he will take one share of stock in your firm.

• The issuing of stock to Guido causes a dilution of your stock value and your share of the company.


Bankruptcy

• A firm is technically bankrupt if its cumulative losses exceed its equity investment.

• Bankruptcy occurs when the sum of the retained earnings and the common and preferred stock is a negative number.

• Stated differently, the management has used up all of the equity of the firm when the negative value of the retained earnings exceeds the value of the common stock.


Performance Evaluation

• Balanced Scorecard- cumulative score for quarters 3 through 6

• Business Plan

• Report to Board

• Strategic thinking and tactical execution

• Executive Briefings

• How well the company is prepared for the future


Measurement of the Firm’s Performance

The Balanced Scorecard


Why Use a Balanced Scorecard?

• It is too easy to get caught up in market share and short-term profits.

• Long-term viability requires that managers also deliver customer satisfaction and invest in the future.

• The balanced scorecard measures both the long-term and the short-term.

• The best managers will be good in all areas measured.


Total Business Performance

Financial performance

Market performance

Marketing effectiveness

Investments in the firm’s future

Creation of wealth

Asset management

Human resourcemanagement


End of Introduction toStrategy and Business Policy


The following slides providean introduction to the

Web Software forStrategy and Business Policy in

the Marketplace


Marketplace is a Fun Way to Learn About Strategy

• It is a business game.

• It is learning by doing.

• It brings to life business concepts, principles, and ways of thinking.

• It energizes the competitive spirit.

• It is transformational – it all comes together, discover you can be a manager


It Is Realistic!

• You do what real-life strategists do:

– Evaluate market opportunities

– Write a business plan

– Raise money by selling your plan to investors

– Do what you said would work – execute the plan

– Be judged not by your promises but by your results


You Will Actually Run the Business

• Design brands

• Distribute products to end users

• Workup advertising campaigns

• Decide on employee compensation

• Schedule production

• Worry about profits

• Manage cash flows

• Etc.


It Is Organized!

• The game scenario follows the logical process of starting up a new company.

• You are guided through the strategic planning and decision-making processes.

• Detailed help files are available at the touch of a button.


You Will Sweat the Details• Investors are challenging• Customers are demanding• Competitors are unrelenting• Many functional, tactical decisions to master• Decisions must be well coordinated and

timed• Cash is always a constraint• Constant skillful adjustment is required to

stay on course and get ahead


You will be Driven!

• Inherent competitiveness – it is in your genes

• Ownership – it is your business, your money, your responsibility

• Captivating – try ideas and see results immediately


• Discussion and debate within each team• Managing many tactical decisions within

financial constraints, demanding customers and aggressive competitors

• Preparation of business plan • Negotiations with Venture Capitalists• Instructor interaction with teams

– Regular Executive Briefings

Development of Your Critical Business Skills


Sequence of Key Activities• Startup phase (3 quarters)

– Organize the team and learn to work together– Learn the business– Test the market

• Transition phase (one quarter)– Prepare Business Plan to accelerate growth– Present Business Plan to and negotiate equity investment with

independent Venture Capitalists

• Growth phase (3 quarters) – Execute Business Plan – Skillfully adjust tactics in response to unforeseen problems and

opportunities

• Final accountability - present Report to Board


Introduction to Software


Marketplace is available via Netscape and Internet Explorer.

Go to: marketplace6.com


The step-by-step process that walks you through the information and decisions.

The software controls your progression to reduce your uncertainty and to help you see the logic of the marketing process.


Be sure to read the directions on how to use

the Marketplace software.


For illustration purposes, suppose you start up a company named Traveler Computers.


What are the pros and cons of each sales

channel?

You can setup an international Web Center for e-commerce, and/or four international

sales offices.


Market Segments(Market Structure)

Price

Performance

WorkHorse

Traveler

Mercedes


Each market segment has its own set of needs.


You must decide which segment you want to target initially. As the exercise progresses, you are asked to select a second segment.

For example, the Traveler segment might be selected.


Once you select a segment, you must design a brand to meet

the needs of the segment.

What features would make a computer more attractive to the Traveler segment?


You set the selling price, decide if you want to use a rebate, and signal to the

sales staff which brand has the

highest priority.


You must design ads which appeal to the

target segment.

You select the benefits to mention in the ad and indicate their order of priority.

You decide which brand will be featured in the ad.


You can select marketing tactics that can increase the traffic to your site.

You can spend more or less than the industry norm to potentially change the relative attraction of your

web site.

What commission should you offer your partners?


Once at your web site, what can you do to increase the probability visitors will make a purchase?

The tactics are not equally good and some may not justify any expenditure.


You must decide on the compensation package for your employees.


You can specify how many should be assigned to each segment and service support.

And, how many sales people to employ.


How many units should you produce to meet demand?


And, how much should you invest in plant capacity for next quarter given your demand

forecast and financial liquidity.


When your decisions are ready to be processed through the Marketplace simulator, a quality

check is made to make sure there were no entry errors and nothing important was forgotten.


Immediately after

processing, you find out

how profitable the firm was in the quarter

that just ended.


You can see your market

share by segment and for the whole

market.

Your company is Traveler.


You are given market research that tells you how satisfied your target segment is with your brand design and those of the competition. 100 is total

satisfaction.


You are also given a profit

analysis of each brand so that you can adjust your

brand strategy.


If a brand is not doing well, you can study other brands and redesign your brand.

Yourbrand

Betterbrand


Grading:The Balanced Scorecard

• Final evaluation will be computed based upon: – Financial Performance (earnings per share)– Market Performance (market shares in 2 target segments adjusted for unmet

demand)– Marketing Effectiveness (customer satisfaction with brand and advertising

designs in 2 target segments (scored 0 to 100) plus unit sales per sales person)– Investments in the Future (spending on new offices and research and

development as percent of sales)– Creation of Wealth (retained earnings/total investment)– Asset Management (asset turnover adjusted for excess inventory)– Human Resource Management (sales force and factory worker productivity)– The Final Score is a single number which combines all of these factors. The

results of Quarters 3 through 6 will be used to compute the grade.


Each quarter, you will be presented with your balanced scorecard. Your goal is to

be the best firm by Quarter 6 in Total Business Performance.


You can also compare your scores against industry standards.


Mechanics of Web Marketplace


Students log on to viewinformation and make decisions

MarketplaceProcessing

Center

Electronic Marketplace Resides at Innovative Learning Solutions


Q1, Organize the Business

• Name the company

• Assign organizational responsibilities

• Share personal learning goals

• Establish team norms


Q1, Establish Strategic Direction

• Analyze market information to evaluate the

market opportunity

• Consider

• Available financial resources

• Costs to open sales outlets

• Costs to set up and operate factory

• Establish strategic direction • Formulate corporate strategy• Formulate functional strategies


Q1, Setup Shop – Tactical Decisions

• Locate factory in Toronto – all firms

• Build fixed plant capacity

• Develop channel options

• Decide on relative emphasis of brick and mortar

offices versus web centers

• Open initial sales office or web center

• Design two brands for target market segments


View Sample Decisions


The Following Slides Represent a Marketing

Lecture on Market Response Functions

Students must design brands in Quarter 1. In selecting components

and price points, they should be aware of the market’s many response

functions.


Customers Buy Benefits,Not Features


Once you select a segment, you must design a brand to meet the needs of the segment.

Using the computer on the road is important to the traveler segment. What features would provide this benefit?

Slim, rugged, portable design

10” color flat screen for portable

Network and Internet connections

Using the computer on the road


How far do you go in giving the customers what they say they

want?

Is more speed, software applications, memory, keys on the keyboard, etc.

always valued?

Could “more of some feature” even make a customer unhappy?


What is the elasticity of the peanut?

Searching for the

Market’s Response Function


Suppose you could design the ideal candy bar. How many peanuts

would you put in the candy bar to make you the happiest?

• None• A few?• A bunch?• A whole lot?


Which Candy Bar has the Most Peanuts?

• Baby Ruth

• Snickers

• Payday

• Milky Way


Which Candy Bar Do You Like the Most?

• Baby Ruth

• Snickers

• Payday

• Milky Way


What does your response function look like for peanuts?

Is more always better?

Would your happiness increase with every new peanut we added to the

candy bar?

Is there a limit?


Number of Peanuts

Influence of peanuts on candy bar enjoyment

None few bunch whole lot

Um-um good

Yuk


What would be your response function for the following?

• Chocolate

• Caramel

• Nougat

• Coconut

• Rice

• Peanut butter


Here are a number of response functions. Which one applies to peanuts, chocolate, coconut, etc?

Hot

Cold

Less More

Hot

Cold

Less More

More is always better

More is good to a point and then ceases

to add excitement


A little is justright, more onlytakes away value

Cold

Hot

Less More

Hot

Cold

Less More

More addsvalue to a point& then takes away value

Response Functions


Hot

Cold

Less More

Little interestuntil threshold

is crossed

Hot

Cold

Less More

Any amount is bad

Response Functions


Hot

Cold

Less More

No reaction/indifferenceto having the feature

Response Functions


Take Any PC Segment, How Excited Will It

Become if You Provide?

• More memory

• More functions on the key board

• More software

• More ….

Just like the candy bar ingredients, you must discover the response function for each PC component.


Select components that yield benefits for Travel PC segment

Rugged Micro- High Wireless 6-hour Low-profile, Compact Trackball Wrist rest casement circuitry resolution modem battery built-in disk, keyboard mouse on keyboard

flat LCD CD drivesdisplay

Portability Use on road Connect to office Easy to use


Learning Points for Quarter 1

• Managing the team

• Organizing the work

• Deciding what one wants from the learning experience



• Market opportunity analysis

• Strategic and tactical planning

• Segmentation and target marketing

• Financial management



• Game theory - competitive positioning

• Brand design – – linking product features to customer benefits– finding the customer’s response functions

• Financial liquidity - cash versus assets


Copyright Dominique Garval 2003

Strategic Planning Mental Discipline

ProblemStrategy

FormulationTactics

Controls

StrategicAnalysis

Objectives Strategy Tactics

•Resources made available•Strategic options•Choice of one option(Chosen Option =Strategic Thrusts)

•Internal appraisal•External appraisal

•Tactical Plans•Execution

•Definition of problem

Note : The chosen option is made of « Strategic Thrusts »


The following slides are for Quarter 2


Q2, Go to Test Market

The Goal is to Maximize Learning and Not Profits.



50% of the firm’s decisions will prove to be unacceptable – be careful



• Set selling prices

• Develop advertising campaign– design 2 ads, one for each brand– determine number of placements per ad

• Develop sales channel– hire sales force for quarter – open new sales outlets for Q3


Q2, Test Market

• Schedule production– forecast demand– set daily production for each brand– run factory simulation, check numbers

• Contract for market research on customers and competition

• Check pro forma financial statements


You are a market maker, not a market taker

• The market is not waiting for you to take their orders.• You must create the market

– Sell brands that customers want and at a price they are willing to pay

– Locate sales offices where the largest number of customers can be found

– Inform and persuade customers to buy a PC through advertising

– Hire sales people to go out and find customers and persuade them to buy your PC


How to Set Price?

• Costs (production, marketing, overhead)

• Profit goals

• What market will bear

• Competition


In the beginning, you will not be able to price above your costs

• There are many startup costs which will exceed your revenues.

• Your production volumes will be very low, resulting in high per unit costs


No Early Profits

Money

0Time

Costs to setup & grow the business

+


Revenues will fall below costs at outset of new business

Money

0Time


Revenue

+


Profits will come later

Profits come later

You are here

Profit Profits0

Time


Revenue

+

-


Your goal is to speed up the adoption rate

Demand

Time

introduction

growth

maturity

decline

You are here, high costs-low demand


What will the market bear?

You must discover the market response function regarding price.


What is the market’s price response function?

YourDemand

YourPrice

Elastic (demand drops fast with increasing prices)

Inelastic (price is not a big factor)


Or, maybe it looks like this?

YourDemand

YourPrice

Demand drops slowly with small price increases and then drops dramatically with larger price

increases


A differential advantage can reduce price elasticity

YourDemand

Price premium for your brand

Less Elastic

Elastic

Differential advantage shifts demand curve and reduces price elasticity


How will the market respond to competitor prices?

YourDemand

Competitor’s Price

Low competitor prices will kill your demand


How to create ads?

Low priceEasy to use

More productiveFast

Office applicationsPicture office workers

Most important

Order of priority implies importance of message to customer

Order of priority tells the ad agency what to

stress in the ad

Your Ad

Least important


How much to say in an ad?(number of benefits)

Which response function is at work?

or

More is good to a point and then ceases

to add excitement

Hot

Cold

Less More

Hot

Cold

Less More

More addsvalue to a point& then takes away value


How often do you advertise?

YourDemand

Number of ads

Diminishing returns

Too little


But it also depends on what your competitors do

YourDemand

Competitor’s Advertising

Strong competitor advertising

will steal away your customers


How many sales people?

YourDemand

Number of sales people

Too many

Diminishing returns

Too few


YourDemand

Number of sales people

Shift the response function upwards with better brands,

prices, advertising, sales force placement

The response function is dynamic!


Managing Inventories and Cash(the razor’s edge)

• High production– Lower unit production costs– Risk of too much inventory

• Uses up large volumes of cash• Risk of brand obsolesce (wrong product in warehouse)

• Low production– Low cash requirements– Higher per unit production costs– Risk of too little inventory –

• Stock outs • Lost revenue• Customer ill will (unhappy customers)


Projecting Demand

• Sales people will probably sell between 30 and 100 units each.

• Demand is a function of market potential of the segment and market and the quality of marketing decisions.

• On average, sales people will sell 50 units each for the entire quarter.


Expect net losses and negative cash flow

Profits come later

You are here

Profit Profits0

Time


Revenue

+

-



• Execution of a coherent strategy

• Management of cash in the face of great uncertainty

• Learning to walk before you run



• Coordinating a host of tactics• Pricing - balancing costs, profit, what the

market will bear, and competition• Testing the market - discovering the

market’s many response functions• Production - managing capacity,

inventories, and costs in light of demand goals


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