S I M U L A T I O N

M A N A G E M E N T

Management Simulation Week3

Getting it togetherGetting it together

3 Levels of Strategy

Corporate-Level : In what business do we compete?In what business do we compete?

Corporation

Business-Level : How do we compete?How do we compete?

Sensors Unit Nano-Tech Unit Cons.Elec. Unit

Functional-Level : How do we coordinate?How do we coordinate?

Finance HR / R&D Production Marketing

Level 3- Functional Strategy

R&D

PRODUCTIONMARKETING

/SALES

PURCHASING

INVENTORY

FINANCE

STRATEGIC BUSINESS UNIT

How do we coordinate?

Marketing Coordinates w/:

R&D when products are launched or repositioned

Production in its unit sales & margins forecast

Finance w/ overall sales projections & the budget

R&D when products are launched or repositioned

Production in its unit sales & margins forecast

Finance w/ overall sales projections & the budget

Marketing when products are repositioned or introduced

Production when products are launched or material costs change

Finance over budget.

Marketing when products are repositioned or introduced

Production when products are launched or material costs change

Finance over budget.

R&D coordinates w/: R&D coordinates w/:

Production coordinates w/:

R&D about new product introduction & material costs

Marketing about demand, scheduling, and inventory

Finance about plant and equipment changes, inventory levels, & margins

HR about levels of personnel training & support

R&D about new product introduction & material costs

Marketing about demand, scheduling, and inventory

Finance about plant and equipment changes, inventory levels, & margins

HR about levels of personnel training & support

Finance coordinates w/:

R&D over budgets & product introductions

Marketing about sales projections, margins & budgets

Production about margins, plant & equipment changes & inventory levels

R&D over budgets & product introductions

Marketing about sales projections, margins & budgets

Production about margins, plant & equipment changes & inventory levels

Management Simulation Week3Strategic Alignment &

Functional Integration

What makes a decision strategic?

Multi-functional in scope & consequences

Requires choice & trade-offs, integration & alignment

R&D

Prdtn

Mrktg

In order to execute & achieve selected growth & competitive strategies--Need to coordinate decisions

across all Functional domains

Marketing

Production

Finance

R&D

HR

Getting In-Sync w/ Functional Planning

The goal of functional

planning is to

achieve a state of Internal

Strategic Alignment

The goal of functional

planning is to

achieve a state of Internal

Strategic Alignment

MARKETINGPRODUCTION

FINANCE

INTERNAL STRATEGIC ALIGNMENT

MARKETINGPRODUCTION

FINANCEAchieved when :

All Decisions made by & within all

functional areas are in sync w/ one

another, As well as with the

overall strategic direction of the firm

Achieved when :

All Decisions made by & within all

functional areas are in sync w/ one

another, As well as with the

overall strategic direction of the firm

Functional Planning Matrices

ExamplesExamples ofof::

internal internal strategic strategic

alignmentalignment

Functional Alignment: In Achieving Cost Efficiency

Functional Alignment: Implementing Differentiation Strategy

Functional Alignment: In Achieving Superior Innovation

Functional Alignment: Superior Customer Rlshps

When When all decisionsall decisions made by & made by & within all functional areas within all functional areas are are in syncin sync w/ one another, w/ one another,

As well as w/ your overall strategic As well as w/ your overall strategic direction -- you achieve…direction -- you achieve…

When When all decisionsall decisions made by & made by & within all functional areas within all functional areas are are in syncin sync w/ one another, w/ one another,

As well as w/ your overall strategic As well as w/ your overall strategic direction -- you achieve…direction -- you achieve…

Distinctive Competencies

Distinctive Competencies

Competitive Advantage*

Distinctive Competencies

*Achieved when you sustain profits above Industry

Average

Distinct competencies needed to achieve selected

competitive strategy

Areas in which you can develop “Distinct Competencies”

MARKETING: Awareness & Accessibility

R&D: Product innovation & design PRODUCTION: Plant Automation &

utilization Human Resources: Worker

Expertise & Training

MARKETING: Awareness & Accessibility

R&D: Product innovation & design PRODUCTION: Plant Automation &

utilization Human Resources: Worker

Expertise & Training

Distinct Competencies

CompetencieCompetencies in s in automationautomation & & human human resourcesresources could lead to could lead to a a competitive competitive advantage in advantage in cost cost leadershipleadership. .

CompetencieCompetencies in s in automationautomation & & human human resourcesresources could lead to could lead to a a competitive competitive advantage in advantage in cost cost leadershipleadership. .

Achieving Competitive Advantage thru Cost-Focused Strategy

Allows for good profit margins on sales while keeping prices low especially in price-sensitive segments…

Allows for good profit margins on sales while keeping prices low especially in price-sensitive segments…

Functional Alignment

Production

Automation - pursued early & aggressivelyCapacity improvements unlikely (may run overtime instead)

Marketing

Spend moderately on promotion & sales

R&D Spend minimally on R&D

Distinct Competencies

Competencies Competencies in in awareness, awareness, accessibilityaccessibility & & designdesign could lead to could lead to a a competitive competitive advantage advantage built uponbuilt upon differentiatiodifferentiationn

Competencies Competencies in in awareness, awareness, accessibilityaccessibility & & designdesign could lead to could lead to a a competitive competitive advantage advantage built uponbuilt upon differentiatiodifferentiationn

Differentiator Seeks to create maximum awareness &

brand equity. Wants to be well known as a maker of

high quality/highly desirable products

Seeks to create maximum awareness & brand equity.

Wants to be well known as a maker of high quality/highly desirable products

Production Less likely to invest in increased automation or production capacity

Marketing Spend heavy on advertising & sales to create maximum awareness & accessibilityPrices tend to be higher

R&D High R&D spending - keep products fresh

Functional Alignment

Virtually all tactical mistakes that are made

when implementing strategy

are a consequence of the lack of synchronization of decisions made in at

least two functional areas

R&D and Production breakdown

You develop a new product but forget to buy plant & equipment for it…the year before it is to be launched…

Marketing, Production & Finance out of sync

The company takes an emergency loan because inventory levels increase…

Marketing, R&D, and

Production out of sync

You reposition a product from

the High End to

the Traditional segment, but do not address their material & labor costs…

Everybody is out of sync!

Financial decisions are made before knowing the budget demands of all R&D, Marketing and Production decisions…

TODAY’S

Begin drafting “functional alignment”

strategic & tactical decisions matrices

Begin drafting “functional alignment”

strategic & tactical decisions matrices

Need to begin to determine the basic objectives & specific tactical decisions that need to be made within & across each management domain …in order to successfully implement your growth & competitive strategies

Need to begin to determine the basic objectives & specific tactical decisions that need to be made within & across each management domain …in order to successfully implement your growth & competitive strategies

Functional alignment- decisions matrixCompetitive Strategy:______

Strategic Objectives

Brand Rnd1

Tactics Rnd2

Marketing1234

1234

R&D1234

1234

Production1234

1234

HR

Finance

EXAMPLE: Functional alignment- decisions matrix

BRAND:_newCompetitive

Strategy: Niche Differentiation

Strategic Objectives

Tactics

Rnd1

Tactics Rnd2

Marketing

R&D

Production

HR

Finance

Competitive Strategy:ND Strategic ObjectivesMarketing Spend aggressively in promotion & sales in Hitech segments…. make our

products easy for customers to find. .. price at a premium. In the low tech segments we”ll exit gracefully, … as they exit the Low End

R&D We will keep our existing HiTech products (HI, PRF, & SIZE), phase out TRAD and LO, and introduce a new brand in the High End segment. Our goal is to offer technology oriented customers products that match their ideal criteria for positioning, age, and reliability

Production Grow capacity to meet demand … avoid overtime After products well positioned, investigate modest increases in automation levels to improve margins, but keep ability to reposition products

HR Spend aggressively on recruitment, training; minimize labor T/O w/ +wage & benefit packages; Focus TQM & Process initiatives on reducing labor & material costs, R&D time and enhancing effectiveness of promo & sales budgets…

Finance We”ll finance investments primarily thru stock issues, retained earnings, supplement w/ bond offerings as needed .. When our cash position allows- issue dividends & retire stock.-We are adverse to debt & prefer to avoid interest payments. We’ll keep assets/equity (leverage) betw. 1.5 - 2.0. We measure performance w/ ROS, Asset T/O,& ROA.

EXAMPLE: Functional alignment- decisions matrix

Competitive

Strategy: Niche Differentiation

Strategic Objectives

Tactics

Rnd1

Tactics Rnd2

Marketing

R&D

Production

HR

Finance

Competitive Strategy:ND Tactics Year 1

Marketing

TRAD – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: price $28.50, promotion budget $600, sales budget $600, and sales forecast 1000.

LO – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: $23.50, promotion budget $600, sales $800, and sales forecast 1400.

HI – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $39.50, promotion budget $1900, sales $1900, sales forecast 400.

PRF – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1900, sales $1900, sales forecast 440.

SIZ –increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1700, sales $1700, sales forecast 390.

New HI – no action required because the product will not emerge from R&D until next year.

Competitive Strategy:ND Tactics Year 1

R&D

TRAD – tweak positioning to reduce age. Reduce reliability to reduce material cost. Example: Increase Performance by 0.1 and reduce MTBF by 1000 hours.

LO – leave positioning alone, allowing the product to age further. Reduce reliability to reduce material cost. Example: reduce MTBF by 1000 hours..

HI– improve positioning and reduce age. Hold reliability (MTBF) steady. Example: reduce Size by 1.2, and increase Performance by 1.2.

PRF – improve positioning and reduce age. Improve reliability to enhance demand. Example: Increase Performance by 1.4, reduce Size by 0.5, and increase MTBF by 1000 hours.

SIZE – improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Reduce Size by 1.4, and increase Performance by 0.5.

New HI – Launch a new High End product, with a project length of 20 to 23 months (no later than December of next year.) Example: positioned at leading edge of High End segment, -- Performance 10.2, Size 9.8. Set MTBF in the middle of the High End reliability range: MTBF 23,000.

TACTICS -Example: decision matrix- to add a new High End

product…

R&DWhat= A New product- Size coordinate = 10. Performance coordinate = 11. MTBF = 25,000 hours. When Due out in 2007

MARKETING

Competitively Price @ $35. Target 68% Awareness (50% @intro +18% will cost=$2M promo budget-allocate web, email & Trade Shows) maintain hi-level Distribution w/ Sales budget = $1.4M…w/ appropo allocations- When 2007.

PRODUCTIONWhat Produce 75,000 units at automation level of 3. When Ready by second month of 2007. How Purchase capacity in 2006.

HRWhat Investments in Concurrent Engineering & Quality Deployment- to reduce R&D Times When & How Much $2M-2005; $1.5M-2006;$1M-2007

FINANCE What Finance $11M. When NOW. How Issue long term debt.

Competitive Strategy:ND Tactics Year 1

Production

For each product, schedule production w/ formula:(UnitSalesForecast X 112%) – InventoryOnHand.

– sell 100 to 300 units of capacity of Hi end prdt-, and given our new Hi end product it is unlikely we”ll need 900 units of capacity in the future.

Make no other plant improvements to capacity or automation UNTIL YEAR 2- WHEN New High End product DEVLOPMENT COMPLETE – buy 600 units of capacity at automation level 5.0.

Competitive Strategy:ND Tactics Year 1

HR Invest $1.5 million per selected – critical TQM (Quality

Function Deployment; CCE ) & Process Initiatives (CPI,JIT,QIT, Channel Support & Concurrent Engineering)

Finance

On proforma Balance Sheet-- add together Cash and Inventory accounts. -- Keep between 15% and 20% of balance sheet assets in Cash plus Inventory.

Drive Cash position until it roughly equals your Inventory position. …. If you are cash poor, issue additional stock to cover the investment in new capacity. If you are cash rich, pay dividends.

AVOID Short Term Debt.

Tonight’s

Begin drafting “functionally aligned” strategic &

tactical decisions matrices

Begin drafting “functionally aligned” strategic &

tactical decisions matrices

Competitive Strategy

Strategic Objectives

Brand Rnd1

Tactics Rnd2

Marketing1234

1234

R&D1234

1234

Production1234

1234

HR

Finance