 |
TABLE OF CONTENTS
The
Simulation: an Introduction | Vision
and Corporate Design | Decision
Variables | The
Contracts Program
The Market Reports
| Firm Reports:
Credit, Sales & Production | Firm
Reports: Financial Statements
The Scent Industry
| Plant and Location
| Subsidiaries
| Bankruptcy
| Forecasting Demand
| NPV | Broker
The Market Reports
This chapter will take an in depth
look at The Market Reports, sometimes referred to as the Industry Reports,
breaking down each item on the reports, piece by piece. The Market Reports
contains market group information, while the Firm Reports contains information
pertaining to an individual firm. Correspondingly, a Market Report is
public information, while a Firm Report is confidential. The Following
Reports show 8 firms competing in Market Group 2. This is quarter 4 of
their second year of operations. All firms have at least one plant and
are producing.
Report for Quarter 4 2001
Sales and Marketing Report
| Area 1 | Area 2 | |||
| Product 1 | Product 2 | Product 1 | Product 2 | |
| Total Sales(in units) |
88335
|
65983
|
29777
|
53973
|
| Total Advertising |
245000
|
155000
|
75000
|
119000
|
| Ending Sales Lost |
46705
|
27079
|
9453
|
21166
|
| Total Wholesale Orders |
10000
|
0
|
0
|
0
|
| Average Commission |
1.64
|
1.86
|
1.76
|
1.97
|
| Average Rep Salary |
12214.29
|
12214.29
|
9866.67
|
9866.67
|
| Average Price |
88.50
|
142.83
|
104.50
|
144.67
|
| Total Backorders |
557
|
6745
|
92
|
5270
|
| Firm | Firm Name | Product 1 | Product 2 | Sales Reps | Product 1 | Product 2 | Sales Reps |
| 21 | Botticelli |
0.00
|
0.00
|
0
|
80.00
|
130.00
|
11
|
| 22 | GGEM |
92.00
|
158.00
|
8
|
200.00
|
200.00
|
0
|
| 23 | Stormy Inc. |
95.00
|
145.00
|
12
|
90.00
|
137.00
|
10 |
| 24 | Neko |
95.00
|
150.00
|
11
|
0.00
|
0.00
|
0
|
| 25 | Scentsationale! |
0.00
|
0.00
|
0
|
90.00
|
137.00
|
10
|
| 26 | Chahat Inc. |
85.00
|
135.00
|
9
|
85.00
|
135.00
|
4
|
| 27 | Stinky-Mania Co. |
80.00
|
125.00
|
16
|
0.00
|
0.00
|
0
|
| 28 | Firm 8 |
84.00
|
144.00
|
10
|
82.00
|
129.00
|
10
|
8 Firms pay sales rep salary
7 Firm(s) pay sales rep commissions on Product 1
7 Firm(s) pay sales rep commissions on Product 2
This figure shows the total sales across this 8 firm market group. The reporting is broken down by area and by product. For example, of 8 firms a total of 88335 units of product 1 was sold in area 1.
Total Advertising
This figure shows the total advertising spent in this market group by
product and area. This allows for some
insight into your competitors' use of advertising as a marketing tool.
How would you best analyze this information? What is your market share
in comparison to your share of advertising within the market group?
Ending Sales Lost shows the number of Product 1 and Product 2 sales lost in your market group. The sales lost data on your Firm Report specifies the number of units your individual firm could have sold had they had enough units to supply demand. Retail buyers, frustrated at your firm stocking out, will reroute the order to any other firm in your market group. Failing in an attempt to obtain product from a competitor in your market group, the purchasing agent will go elsewhere.
The ending sales lost figure, then, marks the unit sales lost in your market group due to lack of product within the market group as a whole.
This number is important as you attempt to forecast demand for coming quarters. Are your sales lost typical of the market group as a whole? Are you supplying the unfulfilled demand of a competitor?
These are the total of all contract orders for the market group. These are orders only. It is uncertain whether all of these orders have been filled. Those orders that were filled have recorded as sales for the quarter. Those orders that were not filled are recorded as backorders and sales lost. This figure is a tool which allows you to discern how many of the total unit sales in your market group can be attributed to contract sales to other firms. If you find that your market share seems to have dropped unexplicably low, you should look at total wholesale orders for your market group. It may be that one firm pushed up total unit sales through contract sales to other firms. For example, if total unit sales was 50000 units for p1a1 and there were 1000 sales lost, plus 40000 wholesale orders it would be safe to assume that a large portion of total unit sales can be attributed to contract sales. This means that your retail market share is not at all as bleak as you imagined it to be and that the total market potential is not as large as you might think.
Determining real market share is made more difficult when large wholesalers are present in your market group. AGV attempts to separate large manufacturers out into separate market groups to alleviate some of this difficulty. In the real world, it is much the same. When analyzing an industry, firms can look at total sales, but have a harder time knowing what portion of these sales are the retail sales they are trying to attain versus sales from wholesalers.
This figure is the average commission paid per product by area. It is an important variable to consider as you analyze your competitors.
Average
Sales Rep Salary
This figure is the average sales rep salary paid by area. This is also
an important variable to consider in your competitor analysis.
This is the average price being charged per product by area. It is a quick marker to determine where your firm's pricing falls within the market group. If all firms are close on pricing, the whole market group may suffer from price wars. If firms find a nice distribution from low price leader to niche, the market is more likely to have good growth.
Individual Firm Information
The Market Group Sales Report also gives you a breakdown of information
per firm. It shows the number and name of each firm as well as the retail
price each firm is charging per product by area. Also shown is the number
of sales reps each firm is carrying per area. This is a good place to
determine which markets your competitors are active in and what their
individual pricing strategies are.
The sales rep listing shows the number of sales representatives ready to sell on the firm's behalf next quarter. Firms often are represented by 3 to 15 sales reps in an area. If the number of sales reps is lower than it should be, in other words, if you have less reps than you had last quarter (though you made no changes in your decision set concerning reps), assume that some of your sales reps have quit. A special notice should appear at the end of your Firm Report, alerting you to a sales rep quitting, but it is always a good idea to check the sales rep listing.
Manufacturing Only Firms
If a firm is a manufacturing only firm selling through contracts exclusively
then you may see a retail price of zero listed. This does not mean that
the firm is not selling. Their sales figures are part of the total units
sold listing. Wholesalers provide difficult reporting problems to resolve
and it is more difficult to determine their marketing strategies. The
best way to find this information is to go online and locate the manufacturers
listing. Find out who is selling, how, and for how much. It will take
some research, but may be important information especially if you are
considering competing with wholesalers.
Report for Quarter 4 Year 2001
| Firms | Firm Name | Stock Price | Div/Share | Net Income |
| 21 | Botticelli |
2.47
|
0.02
|
496765.69
|
| 22 | GGEM |
0.69
|
0.00
|
-82579.44
|
| 23 | Stormy Inc. |
1.21
|
0.00
|
392068.00
|
| 24 | Neko |
2.28
|
0.00
|
1785176.00
|
| 25 | Scentsationale! |
0.03
|
0.00
|
437923.25
|
| 26 | Chahat Inc. |
1.47
|
0.00
|
248238.25
|
| 27 | Stinky-Mania Co. |
3.38
|
0.30
|
900128.88
|
| 28 | Firm 8 |
0.69
|
0.00
|
-1196517.25
|
New Financing
Stock Purchase of 119475 shares at 2.40 by firm 21
Stock Purchase of 364500 shares at 2.27 by firm 24
Bonds called: 250000.00 by firm 24
Plant Expansion Firm 21 has contracted for a 352500.00 plant expansion
in area 2
Stock
Price
The stock price
list shows the current stock price for each firm in the market
group.
FAQ - Stock Price:
The question most commonly asked about stock price is, "How is
it modified?" What determines its movement? Firms
with an excellent quarter or two of earnings may wonder why their
stock is moving up so slowly.
Answer:
Stock prices are determined through an intrinsic model, that is
by a set of statistics as opposed to the setting of prices by
supply and demand for shares in the market place. There
are two powerful ratios that dominate the share price calculation:
current debt/equity ratio but only if it exceeds 1-to-1, as it
will draw down share price as the ratio increases. This
ratio is a proxy for financial risk in a firm's capital structure.
The second
powerful ratio is earnings per share (EPS). Firms with more
shares must produce more earnings in order for the stock price
to remain equal with firms that issue fewer shares. A firm
with fewer shares but the same amount of capital (secured in part
through debt) will find stock price to be more volatile since
earnings and losses will be magnified over the fewer shares.
Firms with all equity (no debt) will have little chance of bankruptcy
and little chance of being in the top stock performers.
EPS is tracked over time so one quarter's sudden change in EPS
will not suddenly boost or radically damage share price.
Other
ratios, such as credit rating and market share changes have minor
affects on stock price but could have longer term impact on EPS
which will have a direct impact on share price.
A good strategy
to raise share price is to repurchase shares, GIVEN the firm has
sufficient cash to buy back shares at the know reported price
plus a premium, and a debt to equity ratio that can withstand
a large reduction in the equity section. Thus, only strong
and financially healthy firms can effectively enact such a strategy.
Dividends would also follow a similar strategy. Dividends
carefully administered can raise share price and at the same time,
directly add value to the shareholder as measured in the NPV ranking.
Div/Share
This figure provides the dividend per share issued for the quarter.
Each firm will develop a different dividend policy which is part of
the larger strategy. It is illegal in this simulation to issue a dividend
with negative retained earnings. If caught, you will be fined. Retained
earnings must be positive both prior to and after the dividend issue,
otherwise you are simply handing the stockholder's money back to him.
You can only increase your dividend $0.50 per quarter. If you drop
this to zero then you must begin all over again at $0.50
For more information on how your dividend policy affects your firm, please refer to the chapter on Net Present Value (NPV).
Net Income
Net Income is shown per firm for the quarter. Net income affects earnings
per share which influences stock price. Note that earnings must be
good over several quarters before you will see dramatic affects on
stock price, credit rating and so forth. You cannot expect that stockholders
will simply jump up and down at one quarter's good showing. They expect
good returns over the entire year.
New
Financing
The New Financing
section of the Market Report shows the issue/repurchase of all
stock. During the initial offering any amount of stock may be
issued above the 300,000 minimum. Repurchasing stock is restricted
to 10% of outstanding shares. It is important to monitor
the stock activity of competitors as this may have a dramatic
impact on stock performance.
Plant
Expansion
The Plant Expansion
section lists plant hours under construction. Keeping an eye on
your competition is crucial. How much are they spending on plant
construction in which area? What size operation are they gearing
toward? Are they expanding in later quarters? It may also be helpful
to identify large firms, especially firms located in low production
cost areas. These firms may be excellent suppliers of product
in the coming quarters. If you aren't building a plant you should
still be aware of who is.
Report for Quarter 4 Year 2001
Production Report
| Type 1 | Type 2 | ||||
| Raw Materials Prices (market) |
1.45
|
1.01
|
|||
| Raw Material Prices (futures) |
1.40
|
1.20
|
| Area 1 | Area 2 | ||||
| Hours Available for Production | |||||
| Firm | Firm Name | Stage 1 | Stage 2 | Stage 1 | Stage 2 |
| 21 | Botticelli |
0
|
0
|
36009
|
27835
|
| New Construction (hours) |
0
|
0
|
30
|
45
|
|
| 22 | GGEM |
23127
|
16844
|
0
|
0
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
| 23 | Stormy Inc. |
19879
|
16409
|
17485
|
15156
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
| 24 | Neko |
27794
|
25091
|
0
|
0
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
| 25 | Scentsationale! |
0
|
0
|
31696
|
18101
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
| 26 | Chahat Inc. |
18336
|
15190
|
11256
|
8891
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
| 27 | Stinky-Mania Co. |
20928
|
17288
|
0
|
0
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
| 28 | Firm 8 |
52256
|
52156
|
52256
|
52156
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
|
Raw Material Prices (market)
This is a price listing for Type 1 and Type 2 raw materials. This
is the at market price for the quarter. If you do not have raw materials
in inventory but schedule production in your plant, the goods will
be made with raw materials at market price. However, you will loose
2 weeks in production waiting for raw materials to arrive. Thus, if
you did not have raw materials on hand going into the quarter, the
finished goods you produced contain raw materials at market. This
information is important when determining or projecting cost of goods
sold.
Raw Material Prices (futures)
This is a price listing for Type 1 and Type 2 raw material futures.
These are materials which you order in the quarter which will be delivered
to you at the end of the quarter for use in the coming quarter. If
you enter a decision to purchase raw materials then this is the price
you paid for those materials. Raw materials futures are always cheaper
than raw materials at market.
Considering both Type 1 and Type 2 materials, a considerable cost savings may be achieved by ordering raw materials a quarter in advance of their need. While it looks like one should always buy raw material futures, the team needs to consider the amount and cost of funds tied up in raw material inventories as well as the cost to store raw materials (carrying costs) from the quarter purchased to the quarter used.
Raw Material FAQ - a common question arises when the raw materials futures price listed on the production report exceeds the at market price. Isn't buying futures always supposed to be cheaper? The comparison can be deceptive. What you need to compare the futures price to is the unknown at market price which will be listed in the upcoming quarter. If you find that futures is higher than the at market price listed on the current quarter report, you know that next quarter the cost of at market raw materials will be that much higher.
Individual Firm Reporting
The rest of the production report is dedicated to individual firm
plant figures. The figures themselves are fairly straight forward.
The only difficult item is the listing of new construction hours in
100's whereas everything else is listed as total hours. When these
new construction hours come online they will be listed as the full
amount. You should always check your firms capacity status of stage
1 and stage 2 each quarter to know if you are losing hours through
poor maintenance or if you made a data entry error.
On the production report you can find information on the plants of your competitors in any market group. Let's say that you are a wholesaler with a large portion of the wholesale market. However, you have two close competitors in different market groups. Demand is not being met. You are building additional plant. You want to know if your competitors are following similar plans and to what degree. You go to the production report and "aha!" they are adding more hours of capacity and expanding into a second area. Overextension or pure genius?
| Current | Next Quarter | Next Year | |
| Economic Index | 100.0 | 101.1 | 98.0 |
| Consumer Confidence Index | 100.0 | Exchange Rate | |
| Bill Rate | 0.0825 | EURO 1.1 | |
| Prime Rate | 0.092 | Yen | |
| Market Index | Advanced 1.7836 | Introduction 0.00 |
Next
Year Forecast
In this Q1, Year 1
report, the Next Year Forecast of 98.0 can be interpreted to mean
that the Q1, Year 2 economic environment will be 2% less than the
100% economy that existed in Q1, Year 1. The forecasts are judged
accurate within 5% by other professional economists but are occasionally
subject to larger errors.
The
Consumer Confidence Index
Price quotes for stocks
of all firms in the simulation are provided in a special stock market
report. The stocks within your market group are quoted in your Industry
Report (see STOCK PRICE on the report). The Consumer Confidence
Index goes beyond the stocks in your market group and represents
all equity stocks on all exchanges in both the EU and NAFTA. The
Consumer Confidence Index is a good indicator of the strength of
the international equity financial markets and can sometimes be
used to forecast overall general economic trends. The index will
be useful when considering the issue or repurchase of your firm's
stock.
Bill
Rate
The Bill Rate on the
above Industry Report of 8.2% annually is the international borrowing
cost for the government. The Bill Rate is important, as it sets
the base on most lending rates for corporations, including yours.
It also sets the base on personal loans for executives that want
to personally borrow funds for stock investments.
Prime
Rate
Firms such as yours
carry more risk than governments and must pay in excess of the Bill
Rate. A measure of what the most credit worthy firms can borrow at
is the Prime Rate; in this report for Q1, Year 1 it is 9.2% annually
(this is the short term annual rate which begins the simulation).
Your firm's individual credit rating is printed on your firm's confidential
Firm Report. At best, your firm will be rated a "1" and at worst a
"5". Your firm was initiated with a credit rating of 1. A $100,000
short term loan secured in Q1, Year 1 will be
at the PRIME RATE of 9.2% annually (or 2.3% quarterly). The
collection of interest on short term loans is in the following quarter.
Your credit rating is sure to deteriorate in Q1 since we set it artificially
at "1" to start the simulation. It will get worse since you are a
small, untried firm even though you start out with a great deal of
cash and low debt. Your short term rate will be printed on your Firm
report. It will move substantially above the prime rate for short
term money borrowed in Q2 of the same year.
The long term rate (another source of bank credit) is the same for all firms and is set annually in anticipation of longer term interest rate movements. At the start of the simulation the long term rate will be set at 12% annually. The long term rate is changed each Q1 in response to the prior year's movement in the Bill Rate. As a financial strategy each Q1, determine what you expect the next four short term quarterly rates to be for your firm. Compare that to the long term rate offered to all firms for the next four quarters. Are you better off with 4 quarterly loans or one long term loan? Be sure to consider if you need the loan for the entire year. Perhaps a combination of the short and long term loans? The minimum loan need might be financed with a long term loan and seasonal peak needs financed with quarterly loans.
The Exchange
Rate
The exchange rate
is currently 1.1 Euro Dollars per U.S. dollar. The
exchange rate begins at 1 Euro Dollar per U.S. dollar in the Global
View simulation for quarter 1, year 1. The exchange
rate has two major impacts on the firm's international, economic
environment. It affects pricing strategy in the EU and it affects
manufacturing costs if a plant is built in the EU. The pricing of
a product in Area 1 (NAFTA) must be in dollars and in Area 2 (EU)
in Euro Dollars.
For discussion, let's assume we manufacture and sell perfume in the NAFTA region. We sell one unit (case) at $65.34 and it costs (labor and materials) $45.34 to make. The perfume then contributes $20 to the firm that can be used to pay other expenses (contribution margin).
Should you export the perfume to the EU? Let's say it costs $4.00 to ship/insure/pay the freight forwarder/and pay the import duties. You can sell it in the EU for 75EURO. Is that good or bad? If $1 can be exchanged for 1.1 EURO, a contribution margin of $22.84 is created (including the $4 cost of shipping). Much better than the $20 contribution margin available when selling them domestically. Of course, if you manufacture the perfume in the EU, there is no shipping cost, and the contribution margin rises to $26.84, given the accepted price of 75EURO (of course, labor rate for production in the EU will also depend upon the exchange rate).
Please note: the known exchange rate published on the Economic Report can be used only as a guide to help set price for the coming quarter. The exchange rate used by the Global World Bank to convert EU sales back into dollars will be the exchange rate quoted on next quarter's Industry Report.
How sensitive are contribution margins to exchange rate fluctuations? Try these two questions using your calculator (divide by the exchange rate to obtain revenue figure in the EU).
1. What if the value of the EURO rose so that for $1 U.S. dollar you could buy 0.7EURO instead of the current 1.1EURO? Keep the EU sales price set at the 75EURO. Bring your unit sale back at the new exchange rate and determine the contribution margin.
2. What if the dollar became strong, so it would buy 1.5EURO and you continued to price in the EU at 75EURO? Determine the new contribution margin.
Is there a perceptible difference to the consumer in the EU? Will demand be affected by fluctuations in the exchange rate? If the exchange rate moves up or down, will it influence consumer buying patterns? The answer is, no. Since the buyers in the European Community sees a constant EURO price, there is no change in demand as long as the stated EURO price stays the same. If you move the EURO price up or down, demand will be influenced as it is in the NAFTA market.
The second impact of exchange rate changes affects those firms that elect to manufacture in the EU.
Assume labor in the brewing process (Stage 1) costs $8.20 per hour. It takes 2.5 hours of labor to complete the process. Stage 2 bottling requires much less time. Only, .6 of an hour. However, to maintain quality, those working in Stage 2 assembly must have considerable dexterity. Labor rates in stage two are therefore set at $9.80 per hour.
The total labor cost is then (2.5 X $8.20) + (.6 X $9.80) which works out to be $26.38. This is really good information, but what does it have to do with exchange rates?
Let's assume you decide to build a plant in the European Union. On EU made units sold in the EU, the firm saves the $4 cost of shipping and duties. So far so good. The workers in the EU plant, however, must be paid in Euro Dollars. At the start of the simulation, given the 1/1 exchange rate, labor rates are the same in the EU as they are in NAFTA.
Let's say the EURO appreciates in value so $1 now only buys .8EURO. The labor cost per unit used to be $26.38 or 26.38EURO. Now, the EURO cost is the same but when paid in US dollars is increased by the ratio of the change in the EURO of 1/.8 or 1.25 times. The new labor cost per unit equals $26.38 X 1.25 = $32.97. Given the additional $4 cost to get a NAFTA made unit landed in the EU, is it still cheaper to make them in the EU? At what exchange rate would that advantage disappear?
Market
Index
The Market Index shows the how stocks in the two levels
of the simulation, the Advanced game and the Introductory game are doing
on average.