You are on page 1of 31

Decision-making Guide

Decision-making Guide
Copyright 2007 cesim@cesim.com

Decision-making Guide

Table of Contents
1. About Cesim ................................................................................................................. 1 1.1. General ............................................................................................................. 1 1.2. Cesim products ................................................................................................... 1 1.3. Contact Cesim .................................................................................................... 1 2. Decision making guide ................................................................................................... 2 3. Introduction .................................................................................................................. 3 3.1. On-line Helper .................................................................................................... 3 3.2. Students home page ............................................................................................. 4 3.3. Company and operations ...................................................................................... 5 3.3.1. Company ................................................................................................. 5 3.3.2. Market Areas and Segments ........................................................................ 5 3.3.3. Products .................................................................................................. 5 3.3.4. Distribution Channels ................................................................................ 6 3.4. Demand ............................................................................................................. 6 3.4.1. Total Market Demand ................................................................................ 6 3.4.2. Companies market shares .......................................................................... 6 3.5. Winning criteria .................................................................................................. 6 4. Decision making process ................................................................................................. 8 4.1. Decision making pages ......................................................................................... 8 4.2. Decision Checklist ............................................................................................... 8 4.3. Decision making flow .......................................................................................... 9 4.4. Practical advice ................................................................................................. 10 5. Decision making sections .............................................................................................. 11 5.1. Market Outlook ................................................................................................. 11 5.2. Products ........................................................................................................... 11 5.2.1. Product portfolio ..................................................................................... 12 5.2.2. Product upgrade ...................................................................................... 12 5.2.3. Design .................................................................................................. 13 5.2.4. Additional features .................................................................................. 13 5.2.5. Compactness and battery life ..................................................................... 14 5.2.6. Capability usage ..................................................................................... 14 5.3. Markets ........................................................................................................... 15 5.3.1. Europe and Asia ..................................................................................... 15 5.3.2. Customer care ........................................................................................ 17 5.4. Research and development .................................................................................. 18 5.5. Financial data ................................................................................................... 19 5.6. Market reports .................................................................................................. 20 6. Results ....................................................................................................................... 21 6.1. Navigation ........................................................................................................ 21 6.2. Summary ......................................................................................................... 22 6.3. Market research reports ...................................................................................... 22 6.4. Income statements ............................................................................................. 23 6.4.1. Product sales .......................................................................................... 23 6.4.2. Repairs sales .......................................................................................... 23 6.4.3. Variable costs ......................................................................................... 23 6.4.4. Administration ........................................................................................ 24 6.4.5. Production line costs ................................................................................ 24 6.4.6. Advertising ............................................................................................ 24 6.4.7. Channel investments ................................................................................ 24 6.4.8. Warranty ............................................................................................... 24 6.4.9. Investment in repair quality ....................................................................... 25

iii

6.4.10. Research and development ...................................................................... 6.4.11. Marketing research ................................................................................ 6.4.12. Operating profit ..................................................................................... 6.4.13. Interest income ..................................................................................... 6.4.14. Interest expenses ................................................................................... 6.4.15. Direct Income taxes ............................................................................... 6.4.16. Profit for the round ................................................................................ 6.5. Balance Sheet ................................................................................................... 6.5.1. Accounts receivable ................................................................................. 6.5.2. Cash and cash equivalents ........................................................................ 6.5.3. Share capital .......................................................................................... 6.5.4. Profit .................................................................................................... 6.5.5. Loans .................................................................................................... 6.5.6. Accounts payable .................................................................................... 6.5.7. Further information .................................................................................

25 25 25 25 25 25 26 26 26 26 26 26 26 26 27

iv

About Cesim

Chapter 1. About Cesim


1.1. General
Cesim provides corporations, universities, and other educational institutions easy-to-use and cost-effective business simulations that can be integrated in various business courses. Headquartered in Finland since 1996, we operate globally through our own offices and partner network.

1.2. Cesim products


Cesim offers three types of simulations to educational institutions: Cesim Global Challenge An on-line simulation designed for strategy and international business studies. It develops students' understanding of the complexity of global business operations in a dynamic, competitive environment. Simbrand An on-line marketing management simulation that develops students' understanding of the marketing decision-making process as a whole, with particular emphasis on profitability. OnService An on-line services management simulation that helps students to practice and learn service business success factors in a Small to Medium sized Enterprise (SME) environment. Simulations can be conducted in a few days or over an entire semester. The number of simulation rounds, schedules, and team structures can be adjusted even after the course has started.

1.3. Contact Cesim


Cesim Oy Arkadiankatu 21 A 00100 Helsinki Finland tel. +358 9 406 660 http://www.cesim.com/ finland@cesim.com

Decision making guide

Chapter 2. Decision making guide


The following presentation describes the students decision making process. The information content is directly comparable to the On-line Helper.

Introduction

Chapter 3. Introduction
This section introduces the On-line Helper and home page of the decision making interface. In addition, it discusses the basic information about the company and markets, as well as the factors affecting the demand.

3.1. On-line Helper


On-line Helper can be accessed by clicking the small signs found in the decision making area. Each of these small buttons will open an information box that provides basic information about a decision, estimate, or information located next to the helper sign. If students want to learn more on the topic, they can press the button located in the lower right corner of the information box. By doing this, they will activate the full-scale On-line Helper at a relevant page. Navigation between different topics is simple. Moving between chapters is done by using the main menu just below the heading. Similarly, navigation within a chapter can be done by using the submenu on the lower left side of the pages. A. Minimize B. Show info C. Activate full-scale On-line Helper. D. Close E. Access further information by activating the full-scale On-line Helper at a relevant page.

A. Heading B. Main menu C. Submenu

3.2. Students home page


Home page is the first page that appears after logging in the system. It has the following dynamic parts. A. Time. This part tells you the current system time. Time might seem a trivial matter but, in fact, it is very important to agree on a common time zone when coordinating work in a geographically dispersed team. For such cases specifically, the system provides a so called Cesim Time. B. Schedule. As the game is based on rounds, being aware of the decision making schedule is very important. For this reason, the time remaining to the current deadline is displayed on the home page. Decisions for the current round must be saved before this deadline in order to be taken into consideration. The results for the round will be available just after the deadline. C. Team information. This part presents general information about the course, as well as teams. In addition, there are two different alternatives for instructors, players, and teams to communicate during the simulation game. D. E-mail. You can use the email function to send e-mail to your team members and the instructor. E-mails are sent to the addresses that the participants have provided during the registration. E. Communication forums. Forums enable you to communicate with the instructor and other participants. Moreover, there is a private forum for the team members only. Forum messages are especially useful in many situations because the messages are accessible at any time in the system. Moreover, the information content of the forums is accessible also after the end of the game. The instructor is also able to view the messages and provide additional guidance if necessary.

3.3. Company and operations


3.3.1. Company
The simulation game begins by starting the first years of operations in a newly established company. The product that the company offers is a personal digital assistant (PDA) that has a variety of optional features. The products to be sold are ordered from a production company of the group and thus, actual production decisions are not part of this simulation.

3.3.2. Market Areas and Segments


The company can operate in two markets, Europe and Asia. The markets are of different size and have different growth rates. In the beginning, Europe is by far the largest market but Asia is developing rapidly. Therefore, be prepared to penetrate the Asian markets in the near future. There are four different customer segments in both markets: Households, High-end households, Companies and High-end companies. The segments react in different ways to your actions, that is, they have different sensitivities to price and advertising. They also appreciate product features differently. Customer segments also tend to use different distribution channels to purchase the products.

3.3.3. Products
The company is able to offer 0-6 differentiated products in both markets, Europe and Asia. PDAs have a variety of attributes, i.e. the levels of compactness and battery life, desing, and additional features. With every product, the team is able to decide whether it will be sold in Europe, in Asia, or in both markets.

If a product is sold in both markets concurrently, economies of scale that are achieved will be reflected in a somewhat lower unit cost. On the other hand, some compromises might have to be made because of different sensitivities to product attributes between segments in Europe and Asia.

3.3.4. Distribution Channels


The distribution channel usage varies by the customer segments. Households purchase the products mainly from department stores and household appliance stores. Specialty stores, on the other hand, are the most important channel for the other segments.

3.4. Demand
3.4.1. Total Market Demand
The total market size is dependent on the following four factors. Market growth rates Average price level in the market Average level of advertising Number of differentiated products available The possibility of a single company to affect a market's total demand is minimal compared to the possibility to affect their own market share.

3.4.2. Companies market shares


The market shares are dependent on: Relative level of prices Relative level of advertising Relative level of channel investments Product attributes Customer care The decisions of one company affect all the companies outcomes in the market. Products that are very similar decrease each other's market shares. In other words, very similar products cannibalize each other. Advertising and channel investment expenditure have a long-term influence on demand, although the degree of the effect decreases by time. The demand for services is calculated separately from the demand for products. However, the decisions about customer care affect the demand for products, as well. Therefore, service operations have to be considered as integrated part of PDA business.

3.5. Winning criteria


The success of SIMBrand companies is evaluated by the performance in the equity markets. Therefore, share price at the end of the game is the recommended winning criteria. Share price is, for the most part,

affected by the level of earnings. The detailed calculation of share price is based on discounted cash flow valuation. In addition to earnings, other important determinants of the share price are R & D activities and the capability of the management team. Reasonable R & D investments are a signal of favourable growth in the future. The management's capability is assessed by the long-term performance, that is, the ability to make sensible decisions in different situations. Therefore, all the rounds have an impact on the share price. Moreover, the distribution of sales between the segments and markets has a slight effect on the share price. Strong position in segments or market areas that grow rapidly is accounted positively. However, markets associated with significant growth potential tend to be riskier because of several uncertainties. To some degree, the share price is also affected by the marketing communication. Advertising has a long-term effect on the success as it increases markets' awareness of your products. Similarly, channel investments improve teams' channel coverage in the long run. Thus, investors tend to favor companies with proper long-term expenditure on marketing communication.

Decision making process

Chapter 4. Decision making process


This section discusses the general issues related to the decision making. The section begins with an introduction of the decision making pages, including the Decision Checklist. In addition, this section provides you with the recommended steps of decision making and some practical advice.

4.1. Decision making pages


Navigate to the decision making pages by clicking Decisions tab on the main menu. The decision making area consists of several pages with different functions. The pages consist of supporting calculations and three kinds of input places.

1. The decisions are entered in the white cells (B). Most of the decisions, like price and advertising, are essential to make in every round, while some like product characteristics and payment period can be left untouched in some rounds depending, of course, on the chosen strategy. 2. In the grey cells (A), you are expected to enter estimates of how the market will develop, what your market shares are going to be, and so on. The estimates affect your decision making because they form the basis of budgeting shown in the system. 3. With certain decisions, where there are specific options to choose from, various menus are used (C). You are able to use these menus by just clicking on a specified area.

4.2. Decision Checklist


You are able to access the Decision Checklist by clicking Decision Checklist tab.

Decision Checklist contains your and your team members decisions, as well as your team's decisions. Team's decisions are used to calculate the results for each round. Therefore, remember to check that your team's decisions are what you want them to be before the round deadlines. A. Your decisions. Your personal decision making account is presented here.

B. Teams decisions. This part of the page displays the decision set that is currently saved as your teams decisions. This set of decisions is used in the calculation of results if you do not make any adjustments before the next deadline. C. Team members decision making accounts. By clicking Go, you are able to visit your team members decision making accounts. This function is useful because it allows you to easily review or even edit the decisions of your team members. However, remember that all the adjustments made to your team members accounts are automatically saved to the system. D. Save the decisions. By clicking Save, you are able to select the corresponding decision set to be your teams decisions. You can select a new decision set to be your teams decisions as many times as necessary during every decision making round.

4.3. Decision making flow


These instructions will help you as you go through the decision support system for the first time. In the beginning, it is often recommended to follow the decision making flow presented below. Later on, as you have learned the basics of the decision making tool, you can make the decisions according to your own preferences. Remember that the analysis of previous rounds results is always an integral part of the decision making process. You are able to find the results in Results section. The results contain a summary report, marketing research reports, income statements and balance sheet. After analyzing the results, you are able to start making the actual decisions.

4.4. Practical advice


We have learned a lot about successful decision making during the past simulation courses. This section presents a brief summary of best practices that seem to be shared by the best teams in the history. Read them through and think if your team could benefit from adopting some of these ideas. For each round, appoint a project manager who is ultimately responsible for coordinating the team effort and saving the final decisions. Circulate the role of project manager. Concentrate on planning and communication. Each team member can, or course, work independently but in order to capitalize on the synergies, you must find a way to co-ordinate the efforts. Use the communication forums to exchange ideas about your strategy and decisions. The forum will store your correspondence so that you are able to review later what has been agreed on. Timing is a very important aspect of the team work. Agree on an internal deadline for each round. By this deadline, all team members will make own decisions and suggestions. Remember also to leave some slack before the actual decision making deadline in order to compile the decisions properly and save them. If you work in different time zones, you can use Cesim time to coordinate the schedules. Use Decision Checklist to compile the final set of decisions. Here, you are able to see all your team members' decisions side by side and in addition, you can access each team member's decision making account. For example, you can use one of the team member's decision sets as a starting point for the team decisions and make the necessary adjustments directly to this account. Finally, you can edit your teams decisions directly in the teams decision making account.

10

Decision making sections

Chapter 5. Decision making sections


This part of the decision making guide follows the suggested decision making flow. Each decision making section is presented in detail. It might be useful to print, at least, this section before you start working on your decisions for the first time.

5.1. Market Outlook


By clicking Market Outlook tab, you are able to access information about market conditions. The section consists of the following three parts. A. Market size forecast. Expected growth of demand and the total market size are shown in a graphical format. There is a separate graph for both market areas, Europe and Asia. B. Additional information.. Certain parameters, such as administration and production line costs are presented here. C. Market outlook. Market outlook provides information about the most important events and trends in the markets.

Please, note that all the information presented on this page is based on forecasts for the year but, in general, the details tend to be accurate. The market size is impossible to forecast accurately as several factors in the markets are also affected by companies' actions.

5.2. Products
Product attributes are one of the most important determinants of the demand. Decisions regarding the product portfolio are, however, challenging because different customer segments appreciate product attributes in different ways. By clicking Prodcuts tab, you are able to access a page that contains all the decisions about product attributes.

11

5.2.1. Product portfolio


There are six product slots available for each team. The number of products offered is one of the most important aspects of a successful product portfolio. It is recommended to increase the number of products in the portfolio gradually as the markets evolve. However, in some situations a more aggressive or cautious strategy might work. The decision about launching a new product or cancelling the marketing of an existing one is made simply by using the target market area tabs. If you have not activated neither Europe nor Asia, the product will not be marketed at all. DISABLED indicates an inactive product. For active product, the target market area has to be chosen carefully. The decision is made by clicking the Europe and/or Asia. Please, note that you can market the product in both markets by selecting both Europe and Asia. You are able to decide a name for each active product freely.

5.2.2. Product upgrade


You do not have to update all the products every round. If you are satisfied with certain products that were offered during the previous period, it is recommended to keep the product attributes unchanged. Then, the production entity is able to continue the production without any adjustments to the production processes. As a result, the production line cost will not be incurred. The decision about product upgrade is made by clicking New.

12

5.2.3. Design
The design does not affect costs. However, design has an important role in product differentiation as the tastes of customer segments differ from each other. Therefore, review the results carefully after each round and try to figure out the latest trends. You are able to decide between the following three alternatives. Classic Avant Garde Sport The decision is made by clicking the Design tabs.

5.2.4. Additional features


You are able to choose between the following five additional features. Photo/Video Entertainment Bling-Bling Locationing Security Decisions about additional features are made by clicking the Feature icons. Selected features are clearly highlighted. Additional features affect both the demand and unit cost of a product. The features do not exclude each other and it is possible to build a product with all five additional features. However, additional features may affect the possibility to implement compactness and battery life.

13

5.2.5. Compactness and battery life


Different customer segments appreciate product attributes in different ways. However, it is safe to say that, ceteris paribus, all segments prefer products with greater compactness and battery life. On the other hand, the better the compactness and battery life the higher the unit cost will be. Therefore, the idea is to find a balance between the combination of compactness and battery life and the appropriate unit cost. The compactness and battery life of the product can be set up to a maximum level dictated by the competence of the company. This is indicated by the competence indices. The initial level of competence indices is 100 for both compactness and battery life. However, by investing in research and development, companies are able to launch products having compactness and battery life beyond 100. Decisions about compactness and battery life are made by using the corresponding decision cells.

5.2.6. Capability usage


Trade-offs are present in the planning of a product. Each of the features affect the stand-by time of PDA. As a result, the maximum battery life that can be implemented in a product decreases from the company's competence index as you add more features. Moreover, each feature requires specific components and affects the complexity of required technology. Therefore, also the maximum available compactness decreases from the company's compactness competence every time you decide to implement a new feature.

14

Capability usage indicator and a figure between 0 % and 100 % show the current level of capability implementation as a proportion of theoretical maximum. If the capability usage index is close to 100 and you want to add a new feature, you have to decrease the battery life or compactness in order to be able to implement new features. Alternatively, you might have to remove certain additional features. The system calculates the capability usage index continuously and does not allow for decisions that would result in unachievable capability usage.

5.3. Markets
After designing a product portfolio, it is recommended to continue with the marketing communication strategy. By clicking Markets tab, you are able to access the marketing communication and pricing decisions. Decisions regarding Europe, Asia, and customer care are made on separate sheets.

5.3.1. Europe and Asia


Decisions for Europe and Asia are developed in a similar way. Please, remember that pricing, forecasting and decisions about advertising and channel investments are made separately for each active product. The left side of the page provides you with useful information. In addition, this part of the page contains several buttons that allow for navigation between products, as well as graphs. A. Product menu. The menu depicts your complete product portfolio for the corresponding market area. By selecting a product, you are able to access the product specific marketing decisions. B. Product information. The most important information about product attributes is presented here. The system updates the information automatically as you navigate between the products. C. Charts. To support the decision making, SIMBrand system provides you with useful information in graphical format. Navigation between the charts is done by using the buttons below the chart window. D. Product specific decisions. This section consists of product specific decisions and forecasts. The decisions are discussed in detail below.

15

1. Pricing. The company is able to set the prices for all its products in both market areas. Therefore, the same product can be sold at different price in Europe and Asia. Price sensitivities are different in different markets and segments. 2. Sales forecast. Sales forecast is actually an estimate rather than an actual decision. Sales forecast is especially important for budgeting purposes. The more accurately you are able to estimate the actual demand, the better is your standpoint for making the other decisions. In addition to the role of an estimate, the sales forecast has a slight effect on products unit cost. This is attributable to the fact that the sales forecasts are also a basis for the order made to the production company. Naturally, the production company adjusts their production to match the demand. However, the more the actual demand differs from the forecasted market size, the more the unit cost increases as a result of last minute adjustments. 3. Advertising. The company sets a budget for its advertising for every market, product and segment. A part of advertising set to a segment will always spill to other segments. Advertising is a type of pull marketing directly aimed at end customers. Advertising expenditure has a long-term effect on demand. When making advertising decisions, you should look at the sales margin that you are expected to generate for the product in a specific market. 4. Channel investments. Channel investments are allocated between the three available distribution channels in case of every product. Specialty stores Household appliance stores Department stores Channel investments are an example of push marketing, being directed at the distribution channels to achieve a broader store coverage and a higher selling motivation. Comparable to advertising, also channel investments have a long-term impact on demand. 16

5.3.2. Customer care


Customer care is formulated through decisions about extended warranty, investments in repair quality, and pricing of repairs. Access the customer care by clicking Customer care located below the main menu. 1. Extended warranty. Extended warranty has a positive impact on demand. On the other hand, extended warranty results in higher costs during the current period and in future periods, as well. A longer warranty period will also affect repair sales negatively since more and more repairs fall under the extended warranty. Please, note that companies have a certain product liability based on national laws and international conventions and as a result, even with no extended warranty period, you are expected to incur some warranty costs. The system automatically calculates the present value of all future warranty costs for every active product. In addition, the total warranty costs are reported for this and previous period. Total warranty costs are affected by actions in the previous rounds. 2. Investment in Repair Quality. Investment in repair quality affects positively the demand for the repairs. It has also a minor impact on the demand for the products. Most of the impact emerges in the round the decision is made for, but the long term impact lasts for a few rounds decreasing gradually along the time. 3. Repairs. Here we mean those repairs that fall outside of the customer warranty and can be charged money for. In case of repairs, you are expected to decide the pricing and estimate the sales. The repairs are outsourced to the production entity of the group and as a result, the pricing is decided as a margin. As a result, the final price to customers is discovered by adding the margin to the costs incurred by the production company. Besides pricing, repair quality and companys competence indices affect the demand for other repairs. Moreover, customers prefer services provided by the actual PDA manufacturer. Thus, the total number of PDAs sold has an impact on the demand for services. Finally, the decision about extended warranty affects the demand for repairs to some degree. The longer the warranty period, the more the warranty repairs replace the sales of repairs.

17

The players should be able to estimate the impact of a longer warranty period, decrease in investment into repair quality etc. when estimating the future demand for repairs. Total market size estimates (on the right hand graph) are always calculated as total nr of teams multiplied by the base demand. Depending on the pricing etc. decisions in relation to other teams, the actual proportion of demand for a given team will vary. If every team had similar decisions, the demand for one team would be equal to the total market demand divided by the nr of teams.

5.4. Research and development


Research and development has an important role in this simulation. Decisions regarding the R&D function are made under R&D tab. A. Cumulative expenditure. The chart presents the cumulative expenditure on research and development. In addition, you are able to review the investments made in the previous period. B. Decide the R&D investment for this period. Allocate funds to R&D by using the decision cells here. By investing in R&D, compactness and battery life indices can be increased. The funds allocated will reap profits with a delay because the improvements will be available for the production lines during the following period, that is, the investments affect next round's competence indices. C. Change in competence indices. The chart on right side of the page shows the increase in both competence indices, that is, compactness and battery life.

18

In addition to this periods R&D investments, the competence indices are affected by the following three factors. Company specific competence indices in the previous period. development results in improvements gradually. Therefore, the year-on-year increase in competence indices is somewhat limited and, to large extent, the competencies in the previous period dictate this periods index levels. The average competence level in the markets. It is always less costly to develop competence that already exists in the market than to develop something that does not yet exist. Research and development investments are very strategic in nature and it is difficult to apply any exact investment calculation method. Even at best, the calculations include heavy assumptions and uncertainties. However, at least when considering R&D investments, you should think the amount of products that you have to sell in order to recover the money that was spend on the development. You should always plan your research and development investments carefully. It is easy to lose substantial amounts of money with careless research and development expenditure.

5.5. Financial data

In addition to financial information, the collection policy is decided in this part of the decision making tool. The decision is made on the Balance Sheet page. The decided term of payment is applicable to all customer segments and market areas. The decision is made in days using the cell next to the budgeted

19

balance sheet. A longer collection period has a small positive effect on demand but, at the same time, it also increases the amount of accounts receivable.

5.6. Market reports


Market Reports can be found by clicking Market Reports . You are able to navigate between the reports by using the tabs below the main menu. Again, market reports update continuously as you make decisions. The reports are mostly based on your own decisions and estimates. Most importantly, market reports provide the decision making with alternative perspectives.

Segment reports provide information about forecasted sales and margins in case of each segment in both markets. The first four pages named after segments show detailed information about the margins and sales you have forecasted. Total sales estimates, advertising expenditure and margin estimates are presented. You are able to make comparisons to the previous period, since the actual sales in the previous period are shown, as well. All Segments page shows a summary of all the necessary information. The last market report, Sales Forecast , enables you to review the distribution of forecasted sales between different channgels. The presented margins are based on your sales forecasts, pricing decisions and unit cost estimates. Furthermore, the total sales of a product are divided for each distribution channel according to customer segments' long-term average purchasing behavior. Therefore, since various short-term market factors affect the customers' channel choices, the presented figures are only rough estimates.

20

Results

Chapter 6. Results
This part of the guide focuses on explaining the most important content of various result reports. The following presentation is divided into paragraphs according to the report structure. Of course, new results become available after the decision making deadline for a round.

6.1. Navigation
Navigation between different reports and rounds is explained below. In addition to navigation, this section provides you with information about different result formats. A. Drop menus. In addition to the latest results, you are able to review the older ones, as well. The navigation between different rounds is done by using the drop menus which are placed just below the main menu. B. Download. By clicking Download , you are able to save the results as an Excel file. This is a very useful function if you want to print the results or perform further analysis. C. Chart presentation. To view the most important aspects regarding the results as a presentation of several slides, click Show Charts. D. Graphs. In addition to numeric data, the most important items are also presented graphically. Graphs can be activated by clicking Graph icons next to the row headings. Data in graphs is very easy-to-understand and therefore, it is highly recommended to view the graphs.

21

6.2. Summary
A set of financial highlights has been selected to give the participants a quick overview of the performance. The calculation of financial ratios is based on the following well-known equations.

Summary provides the participants with information about companies competence indices. As discussed above, investments in research and development affect the competence indices with a delay of one period. Therefore, both last rounds and next rounds competence indices are shown.

6.3. Market research reports


Market research reports outline the performance in each geographic area in terms of sales and product characteristics. The reports are similar in structure for both market areas. The following product-level details are presented in these reports. Price. Sales. Sales are shown in thousands of units. In addition to total sales, the composition of sales by segment is presented. Please, remember that high amount of sold products does not necessarily imply high performance. Proper pricing is also required. Market share. Products market share among each segment, as well as the total market share, is presented. Product characteristics. Detailed information about product attributes enables you to analyze the key success factors with each segment and target market area. Variable unit cost. The actual variable unit cost is also presented. The market research report can be adjusted according to your requirements. You are able to scale the report without limitations. Use the product customization tool placed on the upper-right corner of the page to activate or hide products.

22

A. Products. Use the check boxes to activate or hide products. B. Title bar. The buttons in the title bar minimize and maximize the customization tool.

6.4. Income statements


There are three different income statements. The pro forma reports, called Income statement, Europe and Income statement, Asia, provide information about financial performance in each geographical area separately. Income statement, Total, on the other hand, depicts the group-level performance, that is, both geographical areas combined. Pro forma reports on European and Asian markets provide the participants with complementary details and therefore, actual group-level performance is not necessarily directly observable from them. For example, certain group-level expenses are not allocated to market areas at all and as a result, shown only on the official income statement. The following section presents the reported income statement items.

6.4.1. Product sales


Product sales tell the companys total sales revenue from PDA markets. As PDAs are by far the most important source of revenue, this item is a direct indicator of company size. Pricing and positioning are the main factors influencing the product sales. In general, also greater advertising expenditure and channel investments result in larger sales. There are different strategies in the simulation. Firstly, volume-directed strategy, based on economies of scale in the production, enable lower pricing. Companies selecting this strategic approach believe that low price is completely offset by high sales volume and as a result, satisfactory profitability can be achieved. On the other hand, companies might also select premium-pricing that is based on the launching of new and advanced products with modern characteristics. Despite relatively low sales volume, higher price level covers the high production costs. Which of these two strategies is better, or any intermediate strategy in between, depends on the implementation of the strategy and the development of the markets. Especially the relative sizes of segments having different price sensitivities are important determinants of strategies' success.

6.4.2. Repairs sales


Extended warranty and other product support services are included in customer care in this simulation game. Warranty services result only in expenses. However, customers have to pay for repairs that are not covered by the warranty and therefore, these services generate revenue. The revenue from repairs, however, forms a small proportion of companies total sales. Repairs are clearly non-core operations and as a result, the success in them solely is not enough for the best companies in the markets.

6.4.3. Variable costs


Variable production costs of PDAs, called unit costs for each product, form the majority of total variable costs. The decision-making tool automatically calculates the unit cost estimates shown. Unit costs are subject to economies of scale, that is, the larger the volumes of production for a product, the smaller the unit cost. Therefore, companies might benefit if the same product can be sold in both markets. In the calculation of unit cost estimate, sales forecasts are used as a basis of scale economies adjustment. The sales are also a basis for the order made to the production company. In the end, the production company adjusts their production to match the total demand but the more the actual demand differs from the sales forecasts, the more the unit cost increases as a result of last-minute volume adjustments by the production company. The order amount of a product is simply the sum of forecasted sales for every segment in both markets. It should be noted that the effect of poor forecasts on unit cost is not very dramatic, a few percentage points at most.

23

In addition, companies incur costs related to repairs. As discussed above, repairs are outsourced to the production company of the group. These outsourcing costs are directly shown as variable costs.

6.4.4. Administration
Presence in a market area creates fixed administration costs, a constant amount per market area. Furthermore, additional fixed costs depend on the number of products offered in a market, a constant amount for each product. In short, the more products you offer in a market area, the more administration costs you incur.

6.4.5. Production line costs


Launching a new product and altering an existing product require certain adjustments to the manufacturing facilities and production processes. These adjustments result in certain fixed costs that are called production line costs in this simulation. You are able to avoid these costs by keeping the product attributes unchanged from the previous period. Therefore, long-term plans regarding product portfolio often help companies to save money.

6.4.6. Advertising
Advertising expenditure is completely under the management's control through decisions. The amount spent on advertising should be in line with the sales volume and the product contribution margin. A useful rule-of-thumb is, for example, the following. Advertising budget = Unit margin before advertising x Total unit sales x Estimated advertising elasticity In general, advertising elasticity ranges between 0.1 and 0.3 depending on segment and market area. Therefore a reasonable amount spent on advertising should be, on average, 10-30 % of products contribution margin. Nevertheless, also alternative strategies might result in favourable results depending on the market development. For example, successful companies might have chosen an aggressive strategy and use relatively large investment-like advertising efforts when launching new products. This helps to create a positive product image to customers, and has a long-term effect. Despite the long-term impact, all advertising expenses are expensed during the period when the investment is made.

6.4.7. Channel investments


In addition to advertising, channel investments are also completely under the managements control through decisions. The channel investments should be in line with the chosen strategy and managements vision. Despite the fact that channel investments have a long-term impact on demand, following the prudent accounting policies, the investments are completely expensed during the period when they are made.

6.4.8. Warranty
Extended warranty results in repairs and product replacements during the warranty period because all the products cannot be flawless. Please, note that companies have a certain product liability based on national laws and international conventions and as a result, even with no extended warranty, companies are expected to incur some warranty costs. Depending on the length of warranty period offered in the past, previous rounds sales affect the warranty costs. The warranty costs are generally insignificant compared to the total costs from core operations and therefore, the company has decided not to make any provisions based on the expected future warranty costs, and expenses only costs realized during the current round.

24

6.4.9. Investment in repair quality


Investment in repair quality is also completely under the managements control through decisions. As discussed above, the investment affects positively the demand for repairs and products. The latter effect is, however, relatively small.

6.4.10. Research and development


In this simulation, all research and development costs are expensed against profit in the year the investments are made. Even though R&D is a long-term investment in nature, it is also a risky one with an uncertain payback. Following a conservative approach in accounting, the company has decided to expense the investments immediately. As a consequence, profit for the year may fluctuate depending on the intensiveness of research and development.

6.4.11. Marketing research


This is a fixed cost that cannot be avoided. Companies are committed to incurring this cost in order to receive the market research reports.

6.4.12. Operating profit


Operating profit, or earnings before interest and taxes (EBIT), indicates the company's operating efficiency. Generally, a team that has the highest operating profit relative to the capital employed performs the best in the simulation game. However, it should be noted that in the short-run, that is, one or two periods, differences in marketing and research and development expenditure affect the operating profit a great deal. Normally, the fluctuations caused by these factors tend to smooth towards the end of the game as companies become more mature.

6.4.13. Interest income


Companies earn interest income on cash and bank receivables.

6.4.14. Interest expenses


Debt capital, that is, loans from financial institutions result in annual interest payments. Interest rate on loans affects directly the interest payments.

6.4.15. Direct Income taxes


Multinational companies are usually subject to several tax codes and rates. In general, several countries tax the companies based on the operations located inside their borders. Naturally, in reality, international conventions and general principle of avoiding double taxation increase the complexity. SIMBrand, however, is a marketing simulation, and we have decided that only group-level earnings are subject to taxation at a single tax rate. This simplifies the financial reporting. Moreover, certain decisions that have been found difficult to understand, for example transfer pricing, are not required. Another factor that affects the income taxes is tax loss carry-forwards. This means that if a company has been making losses in previous years, it will only pay taxes after reaching a positive level of cumulative profits.

25

6.4.16. Profit for the round


Profit for the round is calculated by subtracting net financing expenses and income taxes from operating profit. It should be noted, however, that profit for the round does not take the cost of capital employed into consideration.

6.5. Balance Sheet


One of the financial reports is a consolidated balance sheet that combines the information from both market areas. Balance sheet enables the participants to observe companies solvency and the development of capital structure. Because of simplified financial reporting applied in this marketing simulation, only the most important items are presented without providing any unnecessary details.

6.5.1. Accounts receivable


In short, on a company's balance sheet, accounts receivable is the amount that customers owe the company. Sometimes called trade receivables, they are classified as current assets. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. Companies are able to affect the item by adjusting the term of payment.

6.5.2. Cash and cash equivalents


Cash and cash equivalents define the company's liquidity. The company carries at least a minimum level of cash on the balance sheet at all times. Companies earn interest income on these liquid funds. Interest rate is the same for all the companies in the markets.

6.5.3. Share capital


The amount of share capital the companies report on their balance sheets only accounts for the initial amount for which the original shareholders purchased the shares from the issuing company. Obviously, any price differences arising from price appreciation or depreciation in the secondary markets, that is, share price movements, are not included. The number of shares is fixed in this simulation and therefore, the share capital will remain unchanged during the whole simulation.

6.5.4. Profit
Profit is simply the bottom line in the same period's income statement. High profit, in turn, is a sign of short-term profitability.

6.5.5. Loans
The system will automatically raise loans to sustain the liquidity and strengthen the financial position if cash inflows from operations are weak. Naturally, these liabilities are interest-bearing.

6.5.6. Accounts payable


Accounts payable is a file or account that shows the amount of money that a company owes to suppliers. All the companies make their purchases according to the same terms.

26

6.5.7. Further information


If you have further questions or experience any problems, please, do not hesitate to contact support at <simbrand@cesim.com>. In addition, feel free to provide us with feedback of any kind. We truly appreciate it.

27