A Decision Making Simulation Game for CADM

The game is designed for the students to expose them to take decisions in a competitive environment.
By and large, the course materials in the PGDM program teach you to solve problems only from your
perspectives; ignoring actions taken by others. Your unilateral actions often fail in the market place as
you are not familiar to play multiplayer games.

Your performance in this game will not only be affected by the decisions you take but also by the
decisions taken by the competition. You must realize that the actual decision making in the business
world is highly complex as the problems are rarely unilateral and solutions are to be based on
combination of expertise and intuition.

After completion of the game, you will receive your scores that are supposed to be a rough measure
of your decision making ability. But this is a small take. The real learning will emerge after you
compare your performance along with performance of other teams.

You must analyse which decisions succeeded, which decisions were unique, and which were the
common mistakes. Dont complain that the results were not within your control. Keep in mind that
market is always right. Learn the rules of the game to win in a competitive environment.

Rules of the Game

The purpose of the game is to mimic the real-world experience of taking decisions in the areas of
Management Accounting. It acts as an integration mechanism across various courses by bridging the
segmented knowledge of the courses to develop students at solving cross-functional, dynamic, and
unstructured problems. As the game is initiated in the first year, only basic principles of other courses are
integrated; advanced concepts are left for the second year.

The Teams
To play the game, students of each section is split into 10-12 teams and each of them competes against
others in their section. The team members are assigned senior management positions within the company
and are responsible for taking management decisions to realize the goal of the company.

The Story line

The game is based on the following story. Though the situation is fictitious; the students are required to treat
it as a real company and take decisions so as to take the company to greater heights. The company
manufactures and sells apparels made of Jeans. This product is chosen so that every player is familiar with
the product but might not have had any direct experience in the industry, and there is no dominant or
obvious market strategy for marketing this particular product. As none of the students possibly has worked
for a garment manufacturer, the game is expected to be free from any bias.

The company makes various types of products and each product is targeted to a different market segment.
For example, Product 1 is Mens wear that is price-sensitive, Product 2 is ladies wear and a fashion oriented
product, Product 3 is kids wear for a premium segment and so on. However, in this game the product
differentiation strategy is not activated and students can assume that the company is making a single product
and the products are sold at an average price determined by the company. Based on last years of financial
reports of the company and other relevant information, the teams take management decisions to run the
company.

The Scores
The performance of the teams are judged compiling responses collected from the teams and fed to a
computer program that tracks various decision parameters related to marketing, pricing, financing and
production. The goal is simple: to increase the profit of the company. Ultimately teams are judged on how
well their company performed against competitors. A team that scores maximum profit gets rewarded with
full marks and the team performed worst gets the lowest marks. (Students should note that these marks are
equivalent to performance bonuses awarded to senior management members of a company and must try to
maximize their score).

The Initial Briefing

Welcome! You have entered into the competitive environment of business where only the fittest survive.
You are assigned senior management roles in a company that was formed few years ago. But the last years
financial results were far from satisfactory, your prices are declining, your market share has come down and
many new players are entering the market. Your production and financial planning need to be revamped to
rejuvenate profits of the company.

The computer program compiles performance of your company and your competitors and the analysis is
available at the end of the game. You can analyze these reports to compare performance of your company
with your competitors, judge the market trends and find opportunities to expand your business.

The status at the start of the Part 1 of the game pertains to result of the just concluded year. At the beginning
of the game, financial results of all competing teams are identical so that a level playing field is available to
all individual teams. As you take different decisions in course of the business, the results will be different.

You are required to take coordinated decisions that integrate various functions so as to maximize final
performance of the company. The decisions will be related to following areas of your company:
Product Design
Marketing
Operating
Finance

Product Design
Your product forms a part of fashion apparels, where changes in customer expectations are continuous. To
position your product as per current trends in the market, you need to continuously innovate and upgrade
your products. If you fail to quickly upgrade your products, the demands of your products will decline.
When you change your product specification 100% in line with the market changes, you will be able to
realize full demand potential for the product. If you do not change your product specifications at all, you will
be able to realize only 60% of the demand for your product. You must also remember that product up-
gradation is a costly matter as it would increase cost of the product. The cost implications are depicted in
Figure 1.

Fig 1: Impact of Product Design

120%

100%
Demand Realisation

80%

60%

40%

20%

0%
0% 1% 2% 3% 4% 5%
Costs (As % of Sa le s)

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Marketing
Sales Forecast: This is the stating point for production and financial planning. Forecasts are based on last
years figure, market opportunities and growth plan of the company. Actual sales will depend on various
decisions you are taking to increase demands of your product in the market.

Price per unit of the product: You operate in a business that is price sensitive. As a marketer you know
that increase in price will reduce demand of the product but will increase profit margin per unit of the
product. The expected price-demand curve of your product is given in Figure 2. If all other things remain
unchanged, the demand of your product will remain at last years level when price your product would be
equal to the average price charged by your competitors. Pricing your products less than the average price
charged by your competitors, can increase demand of your product.

Fig 2: Price Elasticity Curve

20%

15%

10%

5%
D Price

0%
-50% 0% 50% 100% 150%
-5%

-10%

-15%

-20%

D De ma nd

If you have planned higher sales in your budgets and produced sufficient quantities of your product, you can
capture the additional demand. In case your fail supply the full demand, your competitors are there to fill it.

Sales Promotion: It includes activities that attempt to provide added value to the consumers, wholesalers,
and retailers to stimulate sales. These efforts can attempt to stimulate product interest, trial, or purchase.
Often these activities are original and creative. Higher promotional activities increase awareness among the
customers and demand from the customers are expected to increase. The expected promotion versus demand
curve of your product is given in Figure 3.

Fig 3: Impact of Sales Promotion

160%

140%
Demand (As % of Last Year)

120%

100%

80%

60%

40%

20%

0%
0% 100% 200% 300% 400% 500%
Ex pe nse s (As % of La st Ye a r)

Sales and Distribution Budget: The Company increases accessibility of the product by increasing sales and
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distribution network. A product with low accessibility will reduce demand. Increased expenses in these
areas can help the company harness the increasing market demand. The expected distribution cost versus
demand curve of your product is given in Figure 4.

Fig 4: Impact of Sales Distribution

160%

140%
Demand (As % of Last Year)

120%

100%

80%

60%

40%

20%

0%
0% 100% 200% 300% 400% 500%
Ex pe nse s (As % of La st Ye a r)

Production
The production department will produce as per planning made by marketing. In the first part of the game, it
is assumed that production will produce goods exactly as demanded by marketing subject to their maximum
capacity. It is assumed (for the time being) that there is no opening and closing inventory for work in
progress and raw materials. However, unsold products will be disposed as factory seconds at the
manufacturing cost for production in first shift.

If the marketing forecast is more than the current capacity of the plant, the capacity of the production can be
enhanced either by installing new production facilities or by running plant in second shift. Investing in new
facilities would require new investments and company is not prepared for such expansion. The only
alternative left to the company will be to run production in the second shift but in such case employee are
required to work in overtime and labor cost per unit of product will be 60% more than paid in the first shift.
The running of second shift would also increase fixed manufacturing overhead by 25%.

Finance
Financing decisions would include arranging finances and investing cash surpluses. Cash surpluses can be
used to repay debt and thereby reduce interest cost.

Company should strive to maintain a minimum cash balance of Rs.50,000. Cash balance of less than this
minimum amount, would severely affect production and sales of the company and the company will be
forced to raise emergency loans from other sources. Emergency loans would cost an exorbitantly high rate
and should be avoided by planning cash requirements in advance.

Planned cash requirements can be arranged from a bank at the prevailing interest rate as long as debt to
equity ratio of the company would be less than one. When debt to equity ratio would exceed one, higher
interest rate would be applicable, as shown in Figure 5.

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 Fig 5: Interest Rate versus D/E Ratio

40%

30%
Interest Rate %

20%

10%

0%
0 1 2 3 4 5
Debt to Equity Ratio

It is assumed that all sales will be cash sales and no money is blocked in account receivables. Similarly, all
purchases are made on cash basis and there is no accounts payable.

The Spreadsheet
You will be furnished a Spreadsheet to enter your decision variables and check their likely impact on the
overall performance of the company. However the spreadsheet can take inputs only from you and are not in
a position to analyze decisions of other teams. For example, you might have reduced price of the product and
expecting higher demand of your product. In a similar vein, if majority of your competitors reduce their
prices, the demand of your product may be adversely affected due the action of other teams. You have no
idea what your competitors are doing. All you can do is to take decisions that are within your control.

First Round
Playing the game during the trial rounds will help you to become familiar with the game and compare your
results with that of your competition. In these rounds, you will get a feel that unless your decisions are
superior to others, your performance would deteriorate. It is indeed a game that ensures survival of the
fittest.

Subsequent Rounds
The game will be reset after every round and you will start the game afresh. The game will continue for
several steps as additional concepts are introduced.

In these rounds, it is essential that responses of each team are different from the responses of other teams. If
the responses of your team match with the responses of another team, customers will not be able to
differentiate your product with the product the other team and consequently, demand for both teams would
be adversely affected.

The Final Result

The final result will contain performance scores of your team, scores of other teams, your relative rank
among competing teams based on a selected criterion.

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 Part 1

In this part, you need to analyze the Income statement for the just concluded year (Year 0) given in Table-1
and take following decisions to improve profitability of the company.

Table 1: Income Statement

Income Statement
Year Ended Year 0

Qty Sold 35000 (units)

Revenues 17,500,000 (Price Rs. 500/unit)

Less Cost of Goods sold:
Direct Materials 5,250,000 (Rs.150/unit)
Direct Labor 1,750,000 (Rs.50/unit)
Manufacturing Overhead 3,750,000 Rs.2,000,000 (Fixed)
& Rs.50 per Unit (Variable)

Depreciation 440,000

Cost of merchandise sold 11,190,000

Gross margin 6,310,000

Other Expenses
Sales Distributions Expenses 875,000 (Fixed, budgeted)
Product Development Expenses 350,000 (Fixed, budgeted)
Sales Promotions 2,000,000 (Fixed, budgeted)
Administrative:
Variable (Billing and other) 350,000 (Rs.10/unit)
Fixed (Salaries and other) 2,000,000 (Fixed)
Financing:
Interest on Loan @10% 200,000 @10% of Loan Outstanding

Total operating expense 5,775,000

Income before taxes 535,000

Income-tax @40% 214,000

Net income 321,000

Additional Information
Purchase of Eqpt - Assume no new purchase
Sale of Eqpt - No sale of Equipment
Dividend - No Dividend
Additional Loan Taken -
Retained earnings 321,000

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Product Design Budget
The effect of product design expenses on demand is given in Chart 1, wherein the expenses are expressed as
percentage of last years revenue. It can be observed from the graph that spending more than 4% of last
years turnover may not be beneficial. In fact, more tinkering with the product features can reduce demand.

Unit Sales Price of Jeans

Last years average sales price was Rs. 500 per unit. The price elasticity of your product is given in Chart 2.
You are not expected to alter price by more than +/- 20%. If you enter a price outside this limit, the
computer program will automatically bring it within the boundary limits.

Sales Promotion Budget

These expenses increase awareness of your product and stimulate demand. If you stop promoting your
product, the demand of your product will gradually come down. The relationship of these expenses with
demand changes are given in figure 3. These expenses are fixed in nature and will be incurred as planned
irrespective of actual sales. However you are not expected to spend more than 400% of last years actual
expenses.

Sales Distribution Budget

These expenses are related to make product available to the customers. The expense versus demand curve is
depicted in figure 4. Similar to Sales Promotion Budget, you are not expected to spend more than 400% of
last years actual expenses.

Other decision criteria related to production and financing are not activated in the first part of the game.
These features will be introduced after completion of Budgeting Chapter of the course.

Entering your Decisions

You will be provided a Spreadsheet where you can enter your decision variables and check its impact on
sales, net profit, Return on Sales (ROS) Return on Investment (ROI) and Return on Equity (ROE). However
the results are estimated based on only your input. The Prediction given by the Computer cannot consider
decision taken by other teams. It is assumed that your competitors will take mediocre decisions just to
remain in the market. In fact many of the competitors will fail to analyze the market and loose their market
share. You get an opportunity to capture market share lost by other competitors by taking better decisions.

The computer program will predict the demand of your product based on the insufficient information and
you must overwrite the forecasted quantity based on your analysis and judgment. However, the simulation is
expected to help you to evaluate the impact of various decisions on your products demand. For example,
impact of changing unit sales price on demand of your product can be observed in the spreadsheet. In case
you fail to make any new forecast, you may retype the computer forecast figure as your forecast. This
forecast input will be taken for further calculations. You are advised to change the computer forecast mainly
on account of the following.

Overall market demand of your product is likely to change in the current year. It is estimated that
product of your industry will experience a growth of 10% in current financial year. This growth
expectation would certainly have a favourable impact on your demand.

Some of your competitors will loose their market share and the demand will be passed on to the
more worthy ones.

Some teams will budget lower than the actual demand and their unfilled demand may get diverted to
your product. The program will meet the customer demand by reallocating the demand to those
teams that planned for more sales. In case the total demand of the market exceeds the total planned
supply of all teams put together, such excess demand will be met from external sources by importing
the product.
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A snapshot of the decision space is given in Exhibit 1. You are expected to play with various input
parameters and finalize your decisions so as to maximize your profits.

Exhibit-1 : Enter your Decisions Here

Proforma Financial Statements

The likely impact of your decisions on the financial results of the company is made available in the
following budgeted statements.

Income Statement
Balance Sheet
Cash Flow Statement

These statements give the overall impacts of your decision on the final performance of the company. You
must finalize your decisions after analyzing these statements. A snapshot of proforma financial statements
prepared by the Excel programs presented in Exhibit 2.

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Exhibit 2: Proforma Financial Statements

As explained previously, these statements are prepared based only on your inputs. Actual sales quantity will
depend on the decision taken by other teams. Therefore, the actual financial performance can be computed
after all teams have submitted their decisions. After receipt of decisions from all competing teams, a
computer program will estimate a composite numerical score for each team and based on these scores actual
demand of your product will be established. Any unfilled demand of a particular team will be passed to other
teams based on the composite score.

After the completion of the game, you will receive your performance figures along with performance of
other teams.

The Evaluation
The game will be played in three stages. You will be ranked based on the net income of your company.
Team scores maximum profit will get Full marks and other teams will get marks based on the rank among
teams of your section.