CASE BRIEF

enParadigm’s

TurnkeyTM simulation

Turnkey business case – briefing document

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Copyright © 2016 enParadigm Performance Solutions . All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in

any form or by any means, electronic, mechanical, photocopying, recording or otherwise
without prior permission from enParadigm Performance Solutions .

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Mumbai – 400 072
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Content
s

1. INTRODUCTION 4
a. Chairman’s Memo 4
b. Product 4
2. MARKETING 5
a. Geographies 5
b. Customer Segments 6
c. Promotions 7
3. SALES 9
4. CUSTOMER SUPPORT 10
5. OPERATIONS 10
a. Logistics 10
6. RESEARCH & DEVELOPMENT 11
a. Creative Integration 11
b. Automation 12
c. Quality Improvement 12
7. HUMAN RESOURCES 13
a. Performance Management System 13
b. Workforce planning 15
c. Compensation and Benefits 15
d. Organizational Effectiveness Initiatives 15
8. FINANCE 16

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Memo
From: Richard Lobo, Group Chairman, Lobo Group

Subject: Digital Pen Business Launch

Hello Top Management Team,

Congratulations! You have been selected to head our company’s new digital pen business.
This is a reward to your exceptional service to the company thus far. This is your biggest
responsibility to date. You will be briefed on the industry, the digital pen division, and the
roles that you will step into. The whole division has been revamped after the introduction
of new government regulation regarding anti-competitive practices. Consequently, we
have decided to spin off the digital pen division into a standalone company, with its own
top management and financial responsibilities. The Lobo Group is the sole shareholder of
this subsidiary company. You will have to take charge of the company and rebuild it.

While the entire digital pen industry may currently be struggling for profitability, I am
expecting you to deliver good profits in the long run to justify our continued investment in
the digital pen industry. In other words, I will be looking at the Return on Shareholders’
Equity investment (ROE) as the definitive measure of your performance vis-a-vis your
competitors. You will do well to remember that being part of the top management team
also means that the entire responsibility of ensuring company performance is on you.

You will now be debriefed by the heads of the different departments of the digital pen
company.

Product
Digital pens capture the handwriting or strokes of a person
on paper and digital screens, and convert this information
into digital data. A digital pen is an advanced technological
product that allows users to draw lines of varying widths. It
can work seamlessly with smart phones, tablets and other
smart devices. It has a base that brings up various pencil
tips and colour options.

Only a few companies, including us, have the technology to manufacture digital pens.
Though other companies are trying to acquire this technology, it is felt that entry
barriers are too high for a new entrant to launch within the next few years.

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Marketing
Our responsibility as a company lies in delivering profits to our shareholders, the Lobo
Group. To fulfil this objective, our marketing plan must take into account the business
environment and the moves of our competitors. We have seen that customer buying
behaviour depends heavily on competition, and customers switch fast if they feel that a
competitor is offering them a better deal in terms of the value of the offerings. Therefore, to
remain profitable in the long run, our focus has to be on building sustainable competitive
advantage over our competitors.

Geographies
As you all know, our company has its headquarters in India, Asia. Our main export
geography, North America (NA) has already adopted the new product, and a majority of
the digital pens there use our technology. As of date, Asia, our home geography, is yet to
have the same demand prospects as North America. However Asia is a fast growing
geography, unlike North America, which is nearing maturity. We can also decide to enter
Latin America (LA), currently a very small geography, but with high growth potential. We
feel that Latin America could be the future engine of growth once North America and Asia
slow down. The marketing, sales and customer support plans for each geography should be
relevant to the industry situation in that geography.

An industry market research team has provided the following demand forecasts for the
entire digital pen industry across the three geographies in Table 1. This demand will be
catered to by us and our competitors in the digital pen industry.

Expected Future Quarterly Demand

NA Asia LA

Q1, Year 1 4500 1900 400

Q1, Year 2 7800 5800 3200

The actual growth rates of these geographies will depend on several parameters and might
differ from research projections, based on the attributes of the products and services made
available in each market.

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Entering / exiting a geography

The company does not have a presence in any geography as of now. We can choose to enter
in any combination of the above geographies in the coming quarters. The main overheads
incurred due to presence in geography are the quarterly operating costs of our sales offices
of Rs 300000 per quarter. These increase by about 10% quarter on quarter as we delay
the entry decision. Therefore, early movers into a region will benefit from lower fixed costs
for each quarter. However, in the upcoming quarters, the demand from some of the
geographies may not be enough to support the overheads that we will have to incur if we
enter them early. Besides, our focus in terms of promotions, sales force, customer support
people and top management mind share will be split among the different geographies we
enter. Once we enter a geography, we are free to exit it in any future quarter, but we will
lose the advantages gained by early entry.

Customer Segments
There are three customer segments in each of our geographies - Architects, Corporate
customers and Designers. Though the core technology used in the digital pens sold across
all segments is the same, the services required by each segment are very different. These
services include on-time delivery, promotional activities and customer service support
provided. Customer segment focus must be a key element in our business strategy to
deliver profitability to our shareholders in the long run.

Architects - plan, design and supervise construction of buildings and other infrastructure
projects. Architects use digital pens to draw high precision drawings to visualize the
constructions. They use digital pens to draw high precision straight lines in their drawings
and use it over a variety of writing surfaces, so they prefer standard products that can work
on any device. They rely on promotions and customer support while making their buying
decisions. They buy digital pens priced in the range between INR 5,000 and INR 7,000.

Corporate customers buy our digital pens and sell them under their own brand names.
They are the largest market segment in volume for our digital pens. They are very sensitive
to price, and buy in a range of INR 4,500 and INR 5,500. They give very high importance to
the quality of products and do not prefer products with high defect rates. They rely little on
our sales force as they keep themselves highly informed about the various product offerings
in the market.

Designers specialize in turning a creative idea to a reality. They conceptualize, visualize and
design creative products. Though they are the smallest market segment in terms of quantity
requirements, they are willing to pay a premium if they get the services they require. They
buy digital pens priced between INR 6,000 and INR 8,000. Designers want a very high level
of integration between digital pen designs and other creative tools and software they use.
They give a lot of importance to the integration with creative tools in their purchase
decisions, so that they can draw shapes and curves seamlessly.
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Relative importance of vendor attributes to customer segments

Architects Corporate Designers

Low Price Promotions Sales Support Customer High On-Time Quality

Support Integration Delivery

As the needs of each segment are very different, it will not be possible to satisfy all
the segments at the same time. If we try and aggressively sell to all segments, our
focus in terms of product offering, spend on promotions, sales and customer support
may be diluted. On the other hand, if we align the rest of our business functions such as
R&D, production & planning based on a key segment, our costs may be rationalized and
profits could increase.

Promotions
Promotions are an important part of the selling process for us. In the initial quarters,
awareness about our brand may not be very high, and hence promotions will be required.
Once there is enough brand awareness, we can then take a call on how to go about
promotions. Promotions is especially important for Architects, as it makes it easier for them
to sell to their clients.

There are three different types of promotions we carry out – Price Discounts, Product Add-
Ons (complementary mouse pads, laptop sleeves, tablet covers etc), and Out-door Ads. The
relevance of each type of promotion differs from customer segment to customer segment.
Our marketing research team has compiled the relative importance of each type of
promotion for the different segments

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Impact of Promotions

Architects Corporate Designers

Price Discounts Product Add-Ons Out-door Ads

Spending more than INR 200,000 in a quarter on any single medium in a geography is not
advisable. The additional sales as a result of promotions vary according to the curve shown
below. Beyond a level, the additional sales from every additional INR 10,000 of ad spend in a
quarter decreases.

Promotions effectiveness
Impact on customer demand

Promotions spend

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Sales
Our sales structure is organized geography-wise and then customer segment-wise. Since the
costs of operating in a geography are very high, we have to carefully choose the geographies
we will operate in.

The industry market research team has provided the demand forecasts for the three
customer segments across the three geographies in the table below. This demand will be
catered to by all the players in the digital pen industry. You will have to arrive at a sales
forecast for our company based on our business strategy, taking into account the expected
moves of our competitors. As the industry is intensely competitive, with all players having
very similar product offerings and capabilities as of date, we can expect an average market
share in each segment in each geography to start with. We recommend that you conduct a
bottom-up forecast (for each segment for each geography), and arrive at the aggregate
market share forecast by adding up the individual forecast numbers, rather than getting
fixated on an overall market share target and force-fitting sales forecast numbers for each
individual segment.

Architects Corporate Designers

NA 1850 1700 950

Asia 410 1400 90

LA 100 220 80

Expected Industry Demand for the first Quarter

The number of salespeople required per customer

segment is also different. We should ideally have
Impact on sales

salespeople for each client as the chances of

getting orders increase as per the curve shown to
the right.

However, when the number of salespeople goes

beyond a level, the additional orders per every
new salesperson decrease.

Sales spend

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Customer Support
Our department provides customer service personnel who help our customers solve
problems that arise due to defects in our products. The defect rate indicates the percentage
of finished goods which have technical defects. The decrease in demand due to high defect
rate can be completely offset by employing customer support people. Our current defect
rate is 10%. Identifying the root cause of defects is difficult. However, we can reduce the
defect rate by running successful Quality Improvement research projects, and thus reduce
the number of customer support people required.

Operations
We have a plant in China for manufacturing our digital pens, with a quarterly capacity of
1,000 units. The digital pens are then shipped to our customers in Asia, North America and
Latin America. The cost of production is INR 4,000 and is almost the same for all segments.
We also have a long term contract with a Chinese vendor, CunningFox, who produces digital
pens for us at INR 4,500. The contract has a knowledge transfer clause which enables
CunningFox to produce to our design specifications.

We can add capacity by building new plants with a quarterly capacity of 1,000 units. The
investment required to build a new plant is INR 2,000,000. Plant construction will take one
quarter for completion irrespective of the number of plants we want to construct.

We must make an annual production plan, based on data compiled from different market
research reports. This will enable us to plan our capacity accordingly.

Logistics

The goods produced at our main plant in China, along with those purchased from
CunningFox are stored at external warehouses in China. Cunning Fox pays for the
transportation costs to our warehouses for goods purchased from it. Customers, once
informed of the availability of the goods, collect them from the warehouses, and pay the
loading and transportation costs themselves. Goods are made available to customers on
the basis of the delivery priority given to each customer segment in each geography. If
a customer segment is given the 1st priority, our goods will be allocated to that customer
before we look at fulfilling orders from any other customer. Since we plan our production
before receiving customer orders, we may not be able to clear the digital pens immediately
from the warehouses. The warehouses charge an inventory holding cost of INR 50 per unit
quarter for any inventory that does not get sold during the quarter.

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If we stock out in a quarter to any customer, we lose the unfulfilled demand to our
competitors. The customers to whom we failed to deliver will perceive us as unreliable and
reduce their orders for the next quarter. On the other hand, if we are able to supply to our
customers the unfulfilled orders of competitors, they will reward us by increasing their
orders to us in the next quarter.
We can avoid stock outs to customers who are more important to us, by assigning a higher
priority to them. However if a customer makes a demand for digital pens late in the quarter
as a result of the competition failing to meet their supply commitments, this demand will
be fulfilled only after the previous orders of other customers are met.

Research & Development

Our R&D focus has to be specific to the customer segments that we are targeting. You
would know that different segments have different level of interest in the type of R&D that
we do. There are three types of research projects that can be undertaken by our team.

Creative Integration Projects are aimed at customizing the functionalities of our digital
pens to work seamlessly with the creative software and hard ware tools. Designers and
Corporate customers scan the market closely for higher level of integration. Architects
prefer low integration, as their priority is to make sure that the digital pens work on wide
variety of devices and prefer standard products. We are right now at Integration level 1 of
our product.

The market research studies conducted by our Corporate Marketing team indicate that
having an integration two levels higher than competition could give us around 20%
additional demand in the designers segment, while having an integration two levels lower
than competition could give us around 20% additional demand in the Architects segment.
Each Integration improvement will increase the production cost per unit by INR 100 - 200.
Once we successfully complete a project, all our inventory would get upgraded to the latest
integration level at no additional cost to us. Our Chinese vendor, CunningFox, also
produces digital pens of our latest integration level for us due to the knowledge transfer
agreement we have in place. Due to the high costs incurred in carrying out Creative
integration projects, our corporate marketing guidelines specify that we will not be
allowed to roll back our offering to previous integration levels once a project is
successful. A maximum of one integration enhancement can be carried out in a
quarter.

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Automation projects improve the efficiency of our plants by replacing human labour with
automated machines, and by reducing wastage. The variable cost of production decreases
as a result and the margin on each unit will increase. A successful automation project shall
result in all our plants getting modified and this will be indicated by the Automation Level of
our plants. Our plants in China are currently at Automation Level 1. The variable cost per
unit is INR 4,000, which can decrease by around INR 30 - INR 50 following each successful
automation project. A successful automation project has a smaller variable cost reduction
on digital pens with higher integration levels than on pens with low integration as higher
complex integrations require complex machinery to be installed. The automation of our
plants can be increased by a maximum of one level in a quarter.

Quality Improvement projects are for reducing the defect rate of our products. The
defect rate indicates the number of digital pens having technical defects, which cause
problems in our customers’ offerings. A high defect rate does not result in wastage as the
product can be used after adequate repair work, but will reduce demand for our product.
These repairs are carried out by our customer support people and hence we can offset the
decrease in demand by providing our customers with the required number of customer
people. However, corporate customers do not prefer products with high defect rates. At
present our plants have a defect rate of 10%. A successful quality improvement project will
reduce the defect rate by around 2 percent. Only one quality improvement project can
be carried out during a quarter. The defect rate of digital pens is never more than 10%.

Research Budgets – Research budgets have to be allocated as a part of the decisions for
the quarter. If the cost of a project is within the budget allocated, the project will be
successful; otherwise additional funds will have to be allocated next quarter. If the project
requires a budget less than what was allocated, the additional funds shall be utilized for the
next project. The initial Creative Integration, Automation and Quality Improvement projects
will require an investment in the range of INR 80,000 - INR 125,000, INR 38,000 - INR 60,000
and INR 85,000 - INR 100,000 respectively. The probability of a research project being
successful in a quarter is very low at the lower end of the range, and very high at the
higher end of the range. The research budgets required for further projects need to be
exponentially increased as we keep improving our products, and we will need your help to
understand how we should go about our R&D investment.

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Human Resources
The Human Resources Department is a key player in ensuring both the performance of the
company, and that of each individual manager in the team. We ensure that responsibilities
for carrying out day to day business activities are allocated clearly to the different managers.
We also try to create a positive and healthy work environment, so that all departments are
able to contribute in full towards business decision making. The challenging business
environment in front of us ensures that all of us will be under pressure to perform.
Therefore, conflict resolution and consensus building are key elements in ensuring that top
management make good decisions.

HR conducts a leadership engagement survey at the beginning of every quarter to get a

pulse on employee morale and fulfilment. Through this exercise, HR is expected to resolve
the various interpersonal issues that may have cropped up within the team during their
work. It has been observed that engagement of managers generally depends on the overall
performance of the company, how much their contribution is being valued by the rest of the
team, and of course, their compensation and performance incentives. HR has to ensure that
the morale, happiness and satisfaction of the members of the top management team
remain high.

Performance Management System

The Lobo Group is a merit based conglomerate, and there is no limit to what you can
achieve here if you work hard and perform well. We have identified certain key performance
metrics for each department to give you overall guidance on evaluating your performance.
In every quarter, each top manager will have to set the targets for the key performance
metric pertaining to his/her department. At the beginning of the following quarter, you will
need to check the actual results against the targets set and determine whether you are on
the right track. The different metrics are given in the table. In line with our merit based
philosophy, each member of the top management team is entitled to get a quarterly bonus
of INR 50,000 if s/he meets or exceeds his/her respective performance target. This
money will be paid out from the Lobo Group, and will not be an expense for your digital pen
company.

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Performance Metrics for Heads of Departments

Manager Key Performance Explanation

Metric
CEO % Return on Sales It is the ratio of profit after tax (PAT) to the
(ROS) revenue generated by the company in the
quarter
Head, HR Employee It is the average of engagement ratings
Engagement Rating given by managers in the employee
(ESAT) engagement survey for the quarter
Head, MKT & % Market Share By It is the ratio of revenue of the company
Sales Revenue to the revenue of the industry as a whole
in the quarter
Head, R&D No. of Successful It is the number of research projects
Projects attempted in a quarter that have resulted
in a change in Integration, defect rate or
automation level in the next quarter
Head, Effective Cost per Unit It is the weighted average of the unit cost
Operations of inventory of the previous quarter, the
unit cost of production for the current
quarter, and the unit cost of outsourcing
for the current quarter. The unit cost of
inventory for each quarter is the effective
cost per unit from the previous quarter

Head, Finance Interest Coverage It is the ratio of profit before interest and
Ratio tax (PBIT) to the interest expenses of the
company in the quarter
All Functions Return on Equity (ROE) It shows the return to shareholders for
the capital that they have invested in the
business. It is the ratio of the net profit to
the total equity held by shareholders in
the company

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Workforce Planning

We will need to ensure adequate staffing to meet the business needs of the
organization. We can hire more talent from the marketplace, and also retrench
them as the need arises.

Our corporate head office allows a quarterly budget for a maximum of 15 sales
people for architects, 12 for corporate customers, and 10 for designers in each
geography. We incur a one-time expense of INR 15,000 for hiring or retrenching a
salesperson.

The corporate head office has given us a quarterly budget to have a maximum of 15,
8 and 10 customer support people on our rolls in each geography for architects,
corporate customers and designers respectively. We incur a one-time expense of
INR 25,000 for hiring or retrenching a customer person.

Each sales / customer support person can be allocated to only one customer
segment in one geography for a quarter. However, salespeople and customer
support people can be shifted between different customers / geographies in
subsequent quarters without any additional cost.

Compensation and Benefits

The HR function is also responsible for deciding the compensation and benefits that our
employees receive. While increasing compensation improves employee morale and
productivity, we have to keep an eye on the impact of the same on the profitability of the
company.

The compensation for a salesperson is currently INR 30,000 a quarter, while that for a
customer support person is currently INR 50,000 per quarter. HR can vary the compensation
of salespeople between INR 25,000 and INR 35,000, and that of customer support
people between INR 45,000 - INR 55,000.

Organizational Effectiveness Initiatives

We invest in training and development to improve the effectiveness of our people and the
company as a whole. Improving processes within the company increases the productivity
level of our employees, thus enabling us to conduct more business with lesser people, and
hence reduces the dependence on individual capabilities. We need to invest an amount of
INR 75,000 to improve our sales process level in a quarter, and an amount of INR 150,000 to
improve our customer support process level in a quarter.

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Finance
The finance department keeps an eye on key metrics of the company. It is critical for us to
ensure profitability (net profits), solvency (sufficient cash for our planned operations,
investments and financial commitments), sustainability (new business and repeat business
in the long run), and growth (improvement in key metrics quarter on quarter) of the
company. While all these metrics may be tracked by the finance team, we have to ensure
that all functions in the business consistently follow a well-defined business strategy and
work in a holistic manner to ensure that our targets for these metrics are met. The role of
each function in the company is equally important in the overall performance of the
company. Our shareholders expect us to deliver on these metrics.

For each quarter, we will have to pay 55% of the money we owe our raw material
suppliers on the spot, and the balance 45% in the next quarter. Our customers pay us
40% of the money they owe us on the spot, with the balance 60% coming in the next
quarter. Whenever we do not have sufficient cash for a quarter, we can borrow from the
bank through working capital or long term loans. A working capital loan is currently available
at a quarterly interest rate of 6%, and will be due for repayment in the next quarter after it is
taken. A long term loan will remain on our balance sheet till we pay it back. The interest we
have to pay on a long term loan we have taken will be at the fixed long term interest rate
decided when taking the loan. The interest rates are different for the two types of loans, and
they might vary from quarter to quarter. The interest for each quarter is calculated by the
bank on the outstanding loan amount at the beginning of that quarter. In other words, the
interest for a working capital or a long term loan taken in a quarter is due only in the next
quarter, as the loan amount is released by the bank only by the end of the quarter.

There are some financial covenants imposed by the bank on borrowing. The maximum
working capital loan we can avail of in a quarter is INR 2,000,000, and the maximum
long term loan is INR 4,000,000. The bank will not lend us more than INR 12,000,000 as
long term loans in total.

The interest rate on working capital loans is currently 6%. The interest rate on long term
loans depends on the amount of long term loans we have taken till date. As the loan
amount increases, the risk incurred by the bank increases, and hence our long term interest
rate also go up. The interest rate goes up in slabs, as given in Table 4. For example, if the
loan amount is INR 2,300,000, then the first INR 1,000,000 is at 7%, the next INR 1,000,000 is
at 7.5 % and the next INR 300,000 is at 8%.

The interest rate slabs for long term loans are as follows.

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Slab (INR Million) Interest Rate

0-1 7
1-2 7.5
2-3 8
3-4 8.5
4-5 9
5-6 9.5
6-7 10.5
7-8 11.5
8-9 12.5
9 - 10 13.5
10 - 11 14.5
11 - 12 15.5

Interest Rate for Different Loan Amounts (in INR million)

The interest for each quarter is calculated by the bank on the outstanding loan amount at
the beginning of that quarter. In other words, the interest for a working capital loan or a
long term loan taken in a quarter is due only in the next quarter.

If we run out of cash and have not borrowed from the bank, we will have to go for
emergency loans from loan sharks. Emergency loans come at a premium interest rate of
20% per quarter, and should be avoided by keeping a buffer of cash reserves. They have to
be repaid in the next quarter after they are taken.

Administrative Expenses

The quarterly administrative costs associated with our business are factory personnel costs
of INR 60,000 per plant, and the operating cost of INR 300,000 for sales offices in each
geography we have a presence in. This administrative cost for a geography will keep
increasing by 10% quarter on quarter as we delay our entry into that geography.

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Taxation

According to the Income Tax Act, our plants will be depreciated over a period of 20 quarters,
while research investment will be amortized over a period of 3 quarters. While a plant will be
depreciated from the quarter it is ready for production, research investments will be
amortized once the respective research projects for that investment are successful.

We pay tax on a quarterly basis, at a tax rate of 30% on our profit before tax. The losses for
a quarter cannot be set off against the profits of any other quarter while computing our tax
liabilities.

Assets Liabilities

Cash 2,000,000 Common Stock 4,000,000

Accounts Receivable 0 Accounts Payable 0

Inventory 0

Gross Plant 2,000,000

Accumulated Depreciation 0

Net Plant 2,000,000 Short Term Loan 0

Gross Research 0 Long Term Loan 0

Accumulated Amortization 0

Net Research 0 Retained Earnings 0

Total Assets 3,000,000 Total Liabilities 4,000,000

Initial Balance Sheet (All figures in Rs)

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This concludes your briefing. You now

have enough information to run your
company. I hope you take it to great
heights, and are able to gather insights
from the experience.

Don’t forget, your competition has the

same information too. May the best
team win!

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 enParadigm Performance Solutions
A-102, Sagar Tech Plaza A, Saki Naka Junction, Mumbai – 400 072
www.enParadigm.com talktous@enparadigm.com

Copyright © 2015 enParadigm Performance Solutions . All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted,

in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise
- without prior written permission from enParadigm Performance Solutions .