Facilitator's Handbook (English)

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This document is meant to assist a professor or other facilitator of the Novus Business and IT Training Program. It provides a description of the program, sample calendars for administration, the information included in the business simulator (including facilitator notes), and the critical-thinking exercises designed to accompany the 36 lessons.

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Facilitator's Handbook (English)

  1. 1. Novus Business and Information Technology Training Program Trainer’s HandbookNovus is a comprehensive training course designed for small business owners, college and universitystudents, and other interested individuals to acquire skills related to opening and operating a small business,using common computer software programs in a professional setting, and applying the skills and knowledgethrough a series of critical-thinking exercises and an interactive business simulation software program.The Novus Business and IT Training Program was designed and developed by Peace Corps Volunteers inArmenia through a collaboration with USAID and the Gyumri Economic Development Foundation. 1
  2. 2. TABLE OF CONTENTSTABLE OF CONTENTS .................................................................................................................................... 2NOVUS BUSINESS AND IT TRAINING PROGRAM OVERVIEW .............................................................. 3SAMPLE CALENDARS FOR COURSE USAGE .............................................................................................. 4OVERVIEW OF BUSINESS SIMULATOR....................................................................................................... 8SIMULATOR SCORING METHODOLOGY ..................................................................................................10 YEAR ONE: MARKET SUMMARY ................................................................................................................................................12 YEAR TWO: MARKET SUMMARY................................................................................................................................................18 YEAR THREE: MARKET SUMMARY ............................................................................................................................................21 YEAR FOUR: MARKET SUMMARY ..............................................................................................................................................25 YEAR FIVE: MARKET SUMMARY ................................................................................................................................................28 YEAR SIX: MARKET SUMMARY...................................................................................................................................................32BUSINESS CURRICULUM.............................................................................................................................. 36 LESSON 1: VISION AND MISSION STATEMENTS .....................................................................................................................36 LESSON 2: MARKET ANALYSIS AND SWOT ............................................................................................................................37 LESSON 3: STARTUP CAPITAL .....................................................................................................................................................38 LESSON 4: ESSENTIAL MICROECONOMIC PRINCIPLES FOR BUSINESS ...............................................................................39 LESSON 5: MARKET RESEARCH .................................................................................................................................................40 LESSON 6: OPERATIONS MANAGEMENT: SIMPLE FORECASTING ......................................................................................41 LESSON 8: PLACEMENT AND PROMOTION ..............................................................................................................................45 LESSON 9: MANAGING PEOPLE.................................................................................................................................................45 LESSON 10: BRANDS.....................................................................................................................................................................46 LESSON 11: BASIC FINANCE: UNDERSTANDING THE PROFIT AND LOSS STATEMENT ..................................................47 LESSON 12: SUPPLY CHAIN MANAGEMENT ............................................................................................................................47 LESSON 13: BASIC FINANCE: UNDERSTANDING THE BALANCE SHEET AND KEY FINANCIAL RATIOS .....................49 LESSON 14: WORKING CAPITAL MANAGEMENT ...................................................................................................................50 LESSON 15: STRATEGIC PLANNING ..........................................................................................................................................51 LESSON 16: CUSTOMER RELATIONSHIP MANAGEMENT ......................................................................................................52 LESSON 17: ETHICS AND CORPORATE SOCIAL RESPONSIBILITY ........................................................................................55 LESSON 18: COMPETITIVE ANALYSIS .......................................................................................................................................56 LESSON 19: ANALYZING CASH FLOW .......................................................................................................................................56 LESSON 20: ECONOMICS: UNDERSTANDING MACROECONOMIC INFLUENCES AND ECONOMIC STRUCTURES .......57 LESSON 21: CORE COMPETENCY AND COMPETITIVE ADVANTAGE .................................................................................59 LESSON 22: PORTERS FIVE FORCES THEORY ........................................................................................................................60 LESSON 23: LEADERSHIP AND TEAMBUILDING .....................................................................................................................60 LESSON 24: BUSINESS PLAN WRITING .....................................................................................................................................61COMPUTER CURRICULUM .......................................................................................................................... 63 LESSON 1: MICROSOFT EXCEL 1: EXCEL BASICS ...................................................................................................................63 LESSON 2: MICROSOFT POWERPOINT 1: POWERPOINT BASICS .........................................................................................63 LESSON 3: MICROSOFT EXCEL 2: DATA ENTRY .....................................................................................................................64 LESSON 4: MICROSOFT WORD 1: WORD BASICS ....................................................................................................................64 LESSON 5: MICROSOFT WORD 2: ADVANCED FORMATTING ..............................................................................................64 LESSON 6: MICROSOFT POWERPOINT 2: SLIDE DESIGN ......................................................................................................67 LESSON 7: MICROSOFT EXCEL 3: DATA ANALYSIS ................................................................................................................67 LESSON 8: MICROSOFT WORD 3: ENHANCING DOCUMENTS .............................................................................................67 LESSON 9: MICROSOFT EXCEL 4: REPORT GENERATION ....................................................................................................68 LESSON 10: MICROSOFT WORD 4: FURTHER FUNCTIONS....................................................................................................68 LESSON 11: MICROSOFT POWERPOINT 3: ADVANCED SLIDE DESIGN .............................................................................68 LESSON 12: ARMENIAN BUSINESS RESOURCES ......................................................................................................................69NOTES AND ACKNOWLEDGMENTS.......................................................................................................... 69 2
  3. 3. NOVUS BUSINESS AND IT TRAINING PROGRAM OVERVIEWModern educational theories consistently point to the fact that combining passive education (memorization ofinformation) with experiential learning (application of this knowledge in real-world settings) creates a more stimulatingand rewarding classroom environment. The students begin to see how theories are developed and how theirapplication in the decision-making processes impacts results. The students also become engaged in the learningprocess, advancing beyond the role of listener to that of implementer. Further, the professor transitions from the roleof lecturer to that of facilitator, where he or she poses problems and pushes the students to think critically about howto solve them. The professor expands the boundaries of the students’ creativity, allowing them to experiment, makemistakes, learn from failure, and understand how to properly apply their knowledge in their post-university careers.In Latin, the word ‘novus’ means fresh or novel. The Novus Business and IT Training Program (Novus) is an open-source, multilingual teaching aide, designed to address many of the classroom-environment challenges noted above.Through a dynamic, computer-based program, Novus incorporates the following tools: ● Twenty-four 10-20 minute video-based tutorials on various business topics, designed to focus on starting and operating a small manufacturing business. Example topics included: Strategy, Marketing, Product Development, Customer Service, Finance & Accounting, and Management/HR. The 24 lessons are available in both Armenian and English. ● Twelve 10-20 minute video-based tutorials on the application of Microsoft Office (PowerPoint, Word, Excel) in a business setting, starting from a beginner’s level and progressing to cover intermediate-advanced level topics. The 12 lessons are available in both Armenian and English. ● A decision-based business simulation game, through which students will make strategic decisions for a fictional business to assess the impact of decisions and understand how to apply the various skills taught in the video- based tutorials. ● This facilitator’s guide, which includes a corresponding set of suggested classroom activities to reinforce the topics taught in the program and suggested schedules for optimal usage of the entire program.The application of the Novus tool addresses many of the challenges facing the modern university: ● The video-based lessons augment many topics in the economics and business curriculum that are fundamental for Armenian students, specifically computer literacy and small business skills that are transferable in today’s global economy. ● The modularity of the program allows professors to pick and choose from the video lessons, focusing on topics that they feel are most relevant to their curriculum design. ● The business simulation game allows the students to make decisions regarding their business and assess the results of these decisions. By allowing multiple teams to run the same simulation, the students can benchmark their results against others to identify best and worst case outcomes, and also create an environment of educational competition.The Novus program consists of one CD-ROM containing video-based trainings and a business simulation game aswell as the facilitator’s guidebook. Additionally, these resources are available for free download from the followingwebsites: ● Microsoft’s Learning Gateway Server: [INSERT LINK] ● SourceForce: http://sourceforge.net/projects/novus/ ● Vimeo: https://vimeo.com/novusprogram ● SlideShare: http://www.slideshare.net/NovusProgram 3
  4. 4. SAMPLE CALENDARS FOR COURSE USAGEOne of the main advantages of the Novus program is that it is a culmination of short, manageable training modules.Almost all of the 36 training videos are less than 20 minutes in length, which allows the facilitator to easily use specificlessons or combine different lessons about a certain theme, such as marketing. In the Business Curriculum section ofthis Handbook, there is also a classroom activity suggested for use after viewing each lesson. The activities are meant toinspire critical-thinking and teamwork in applying the knowledge acquired in the video lesson. Each is also relativelyshort, such that a particular video and its corresponding activity can be completed in the span of 30 minutes.Each lesson is embedded in the business simulator, but the simulator itself can be used as a tool. The most effectiveuse of the Novus program will be for the course participants to watch the recommended videos, participate in thecorresponding activities, and use the business simulator in parallel. When used simultaneously, course participants willlearn the valuable skills of entrepreneurship, how to use a computer for professional purposes, and apply these abilitiespractically through the business simulator.The modularity of the Novus program allows it to be administered over various timeframes. To help illustrate thispoint, below there are three sample calendars that show how the Novus program could be given over one week, onemonth, or one semester. Recall that the business simulator has six years, or rounds, for the course participants to workthrough. In these sample calendars, one hour is appropriated for each round, during which the teams will read themarket summaries, make the round decisions, and discuss the results. Additional time may be given for the teams toshare their results with one another. The facilitator may ask the following questions to stimulate discussion: • What was your team’s strategy during the last round? • How well did the members in your team cooperate? • Did someone assume the position of the team’s “leader”? • How did your actual results compare to your forecasted results? • What specific areas showed very large differences between your forecasted and actual results? • Is there any decision point you would have approached differently? • Looking at your Balanced Scorecard, what specific areas does your team need to focus on in the next round?In addition to these discussions, the facilitator can also have the participants work on a final project that pushes themto apply the lessons taught in the videos. In the final project, the teams can work together to use Microsoft Office(primarily PowerPoint and Excel) to create a presentation for the class about their team’s results throughout all sixyears of the business simulator. The facilitator can adapt the project to the skill level of the participants, but an exampleof a project is provided below.Final Project Example: After watching the 36 video lessons and playing through all six rounds of the businesssimulator, each team will create a PowerPoint presentation about their strategy and results with the simulator. Twomembers of the team will be elected to use this PowerPoint and give a 10-15 presentation in front of the rest of theclass. The PowerPoint presentation must have at least one slide addressing each of the following points: 1. Title slide 2. Strategy of your team 3. Mission Statement and Values of your team 4. SWOT 5. Market Analysis – customer preferences 6. Market Analysis – market segmentations and growth trends 7. Financing decisions (debt and equity) 8. Equipment purchases 9. Hiring decisions and people management 10. Actual financial results – income statement, balance sheet, cash flow statement 11. Variances between projected results and actual results 12. Results of balanced scorecard 13. Overall assessment of performance throughout the gameOther Requirements: In addition to the PowerPoint slides, each presentation must include at least three charts, threepictures, and two tables developed in Microsoft Excel. 4
  5. 5. SAMPLE CALENDAR: NOVUS PROGRAM GIVEN OVER FIVE DAYS DAY 1 DAY 2 DAY 3 DAY 4 DAY 5 Basic Finance: Understanding Porters Five 9:00 Novus Overview Simple Forecasting the Balance Sheet and Key Competitive Analysis Forces Theory Financial Ratios Introduction to Managerial Leadership and 9:30 Vision and Mission Statements Working Capital Management Analyzing Cash Flow Economics Teambuilding Economics: Understanding Business Plan10:00 Market Analysis and SWOT Placement and Promotion Strategic Planning Market Types and Market Writing Influences10:30 Break Break Break Break Break Business Simulator: Year 3 - Business Simulator: Year 5 -11:00 Startup Capital Managing People Teams Read Market Summaries Teams Read Market Summaries Teams Work on and Make Round Decisions and Make Round Decisions Final Project Business Simulator: Year 3 - Business Simulator: Year 5 - Essential Microeconomic11:30 Brands Teams Review Year 3 Results, Teams Review Year 1 Results, Principles for Business Class Discussion Class Discussion12:00 Break Break Break Break Break Microsoft PowerPoint 2: Slide Microsoft Excel 3: Data Microsoft Word 4: Further 1:00 Microsoft Excel 1: Excel Basics Design Analysis Functions Teams Work on Microsoft Excel 4: Report Microsoft PowerPoint 3: 1:30 Microsoft Excel 2: Data Entry Microsoft Word 1: Word Basics Final Project Generation Advanced Slide Design Microsoft PowerPoint 1: Microsoft Word 2: Advanced Microsoft Word 3: Enhancing 2:00 Armenian Business Resources PowerPoint Basics Formatting Documents 2:30 Break Break Break Break Break Business Simulator: Year 2 - Customer Relationship Core Competency and 3:00 Market Research Teams Read Market Summaries Management Competitive Advantage and Make Round Decisions Overview of Business Simulator, Business Simulator: Year 2 - Business Simulator: Year 6 - Group Ethics and Corporate Social 3:30 Watching Explanatory Videos, Teams Review Year 2 Results, Teams Read Market Summaries Presentations Responsibility Break Class Into Teams Class Discussion and Make Round Decisions Business Simulator: Year 1 - Business Simulator: Year 4 - Business Simulator: Year 6 - Basic Finance: Understanding 4:00 Teams Read Market Summaries Teams Read Market Summaries Teams Review Year 1 Results, the Profit and Loss Statement and Make Round Decisions and Make Round Decisions Class Discussion Business Simulator: Year 1 - Business Simulator: Year 4 - Course 4:30 Teams Review Year 1 Results, Supply Chain Management Teams Review Year 1 Results, Introduction of Final Project Conclusion Class Discussion Class Discussion 5
  6. 6. SAMPLE CALENDAR: NOVUS PROGRAM GIVEN OVER ONE MONTH DAY 1 DAY 2 DAY 3 • Novus Overview • Microsoft Word 1: Word Basics • Overview of Business Simulator, Watching • Vision and Mission Statements • Microsoft Word 2: Advanced Formatting Explanatory Videos, Break Class Into Teams • Market Analysis and SWOT • Microsoft Word 3: Enhancing Documents • Business Simulator: Year 1 - Teams Read • Startup Capital • Microsoft Word 4: Further Functions Market Summaries, Make Round Decisions,WEEK 1 • Essential Microeconomic Principles for Business Review Year’s Results, and Participate in Class Discussion TOTAL TIME = 120 - 150 minutes TOTAL TIME = 100 - 130 minutes TOTAL TIME = 70 - 100 minutes • Market Research • Microsoft Excel 1: Excel Basics • Brands • Simple Forecasting • Microsoft Excel 2: Data Entry • Basic Finance: Understanding the Profit and • Introduction to Managerial Economics • Business Simulator: Year 2 - Teams Read Market Loss Statement • Placement and Promotion Summaries, Make Round Decisions, Review • Supply Chain ManagementWEEK 2 • Managing People Year’s Results, and Participate in Class • Basic Finance: Understanding the Balance Sheet Discussion and Key Financial Ratios • Working Capital Management TOTAL TIME = 130 - 160 minutes TOTAL TIME = 110 - 140 minutes TOTAL TIME = 130 - 160 minutes • Microsoft Excel 3: Data Analysis • Strategic Planning • Microsoft PowerPoint 1: PowerPoint Basics • Microsoft Excel 4: Report Generation • Customer Relationship Management • Microsoft PowerPoint 2: Slide Design • Business Simulator: Year 3 - Teams Read Market • Ethics and Corporate Social Responsibility • Business Simulator: Year 4 - Teams Read Summaries, Make Round Decisions, Review • Competitive Analysis Market Summaries, Make Round Decisions,WEEK 3 Year’s Results, and Participate in Class • Analyzing Cash Flow Review Year’s Results, and Participate in Class Discussion Discussion TOTAL TIME = 110 - 140 minutes TOTAL TIME = 130 - 160 minutes TOTAL TIME = 110 - 140 minutes • Economics: Understanding Market Types and • Porters Five Forces Theory • Business Simulator: Year 6 - Teams Read Market Influences • Leadership and Teambuilding Market Summaries, Make Round Decisions, • Core Competency and Competitive Advantage • Business Plan Writing Review Year’s Results, and Participate in Class • Business Simulator: Year 5 - Teams Read Market • Microsoft PowerPoint 3: Advanced Slide Design DiscussionWEEK 4 Summaries, Make Round Decisions, Review • Armenian Business Resources Year’s Results, and Participate in Class • Course Conclusion Discussion TOTAL TIME = 110 - 140 minutes TOTAL TIME = 100 - 130 minutes TOTAL TIME = 70 - 100 minutes 6
  7. 7. SAMPLE CALENDAR: NOVUS PROGRAM GIVEN OVER ONE SEMESTER WEEK 1 WEEK 2 WEEK 3 WEEK 4 DAY 1 DAY 2 DAY 1 DAY 2 DAY 1 DAY 2 DAY 1 DAY 2 • Novus • Microsoft • Microsoft • Startup Capital Overview Word 3: Word 1: • Overview of • Essential • Simple • Vision and Enhancing • Placement and Word Basics Business Simulator, Microeconomic ForecastingMONTH Mission Business Simulator: Documents Promotion • Microsoft Watching Principles for • Introduction to 1 Statements Year 1 • Microsoft • Managing Word 2: Explanatory Business Managerial • Market Word 4: People Advanced Videos, Break • Market Research Economics Analysis and Further Formatting Class Into Teams SWOT Functions • Supply Chain • Microsoft • Customer • Microsoft • Brands Management Excel 3: Data • Working Relationship Excel 1: Excel Business • Basic Finance: • Basic Finance: Analysis Capital ManagementMONTH Basics Business Simulator: Understanding the Understanding • Microsoft Management • Ethics and 2 • Microsoft Simulator: Year 3 Year 2 Profit and Loss the Balance Sheet Excel 4: • Strategic Corporate Excel 2: Data Statement and Key Financial Report Planning Social Entry Ratios Generation Responsibility • Economics: • Microsoft • Business Plan Understanding • Porters Five • Competitive PowerPoint 1: Writing Business Market Types and Forces Theory BusinessMONTH Analysis PowerPoint Basics Business • Microsoft Simulator: Market Influences • Leadership Simulator: Year 3 • Analyzing • Microsoft Simulator: Year 5 PowerPoint 3: Year 4 • Core Competency and 6 Cash Flow PowerPoint 2: Advanced Slide and Competitive Teambuilding Slide Design Design Advantage • Armenian • Teams • Introduction BusinessMONTH Work on • Teams Work on • Group of Final Resources 4 Project Final Final Project Presentations • Course Project Conclusion*E ACH CLASS IS APPROXIMATELY ONE HOUR IN LENGTH 7
  8. 8. OVERVIEW OF BUSINESS SIMULATORThe purpose of the business simulation game is to give students an opportunity to apply the knowledge acquired in theclassroom to a real-world, yet fictional, setting. In the game, a student or team of students will make decisions thatinvolve the founding and operation of a beer brewery. The game will have six rounds, with each round representingone year of business operations. At the beginning of each round, the students will receive a detailed description of themarket environment in which their business is currently operating. For example, the ‘Year 1’ summary would includeitems such as a description of the type of manufacturing business the students are about to start, an overview of themain products and/or services their business can provide, etc.Based on this description, each decision point in the game will require the team to select from a closed-end (multiplechoice) option or make an open-end decision (financial allocation). The core of the game is the ways in which thecollective decision points impact the cumulative performance of each particular business. Each individual decision willbe compared against the predetermined Best Case Scenario decision or allocation. Working individually or as a team, thestudents will input their decisions into the game and will receive a scorecard. The accuracy of a team’s decision relativeto the ideal outcome will result in a series of scores, which will be interrelated and weighted to produce an overallscorecard. The scorecard will produce both quantitative results and qualitative results. This scorecard measures theholistic results of their past decisions on the financial success of the business relative a predetermined Best Case Scenario;the students can further benchmark their unique results with other students or teams on both round-by-round andcumulative to-date bases. For example, if one team’s business’s revenue is significantly higher than another’s, the twoteams are encouraged to ask “Why?” or “What decision did your team make concerning…”There are five main components to the simulator software: 1. The Results Tab: This will show a team’s performance for all of the years completed in the game. This includes income statements, balance sheets, and cash flow statements. These financial reports should be familiar to the participants based on the Novus Business video lessons. The results tab also has a balanced scorecard, which categorically rates a team’s management performance in several key areas, including production, sales, financial health, employee morale, working capital management, and brand strength. All of these scores are combined together and added to previous year’s scores to create the Managerial Effectiveness Score. 2. The Information Tab: The Information Tab includes the market information that a team will use to make decisions, as well as instructional videos on how the key parts of the game work. 3. The Decision Tab: The Decision Tab is where a team actually makes business decisions. There are five decision panels: Equipment Purchases, Financing, Production, Human Resources, and Other Spending. Each of these panels will have the relevant information from the market information reports on the Information Tab, as well as the controls used to enter decisions. 4. The Review Tab: The Review Tab is used to show all of a team’s decisions for the current round. Participants can also review a previous year’s decisions for reference. This is also where a team will submit decisions for the current round. It is very important to make sure to review your decisions prior to submitting. The submission button can only be pressed while the current year’s decision list is selected. 5. The Finance Tab: The Finance Tab is where a team can see the automatically generated Pro Forma Financial Reports for your decisions. These will update as decisions are made, so participants should check them frequently during the decision making process. It is important to note that the Pro Forma reports assume that a team sells 100% of the beer that is planned to be produced for that round.There are five panels on the Decision Tab: EQUIPMENT PURCHASING PANELThe Equipment Purchasing Panel is where a team will make very important decisions regarding the quantity of ale andlager manufacturing assemblies, which packaging equipment a team wants to purchase, and how much finished goodsstorage space a team wants to have. These decisions can only be made in rounds one and four. The manufacturing andpackaging equipment cannot be resold, so it’s critical that participants make good decisions based on the marketinformation provided.For manufacturing equipment, use the drop box to select the type of beer production assembly desired. Alemanufacturing assemblies cost $150,000 apiece, and lager manufacturing assemblies cost $200,000 apiece. Once the 8
  9. 9. desired assemblies have been selected, click the “purchase” check box to buy the selected equipment. Teams can seethe total cost of your purchases at the bottom.There are three packaging options: kegs, bottles, and cans. Each packaging option requires its own equipmentassembly. The keg packaging equipment costs $30,000, while the bottling and canning packaging equipment cost$40,000 apiece. If teams do not buy a particular packaging assembly, they will not be able to produce that product.After brewing and packaging the beer, teams must have a place to store it until shipment to customers. This FinishedGoods Storage Space is measured as a percentage of the maximum total brewing output. If teams select too little space,they will not be able to properly store all of you finished product, and some of it will go bad or be misplaced. If teamsselect too much space, they will be paying more rental costs than are necessary. FINANCING PANELMoney is an essential resource of business. A business will need money to cover the starting costs of purchasingequipment and covering overhead costs while it becomes operational. During the first year of business, teams will havethe option of raising money from equity sources. This money comes from investors who will own a portion of thebusiness commensurate with their investment and the particular agreement the owner, or proprietor, has made withthem. Equity financing, unlike debt financing, does not require interest to be paid on the amount of money received, orpay it back. While some mature businesses may issue dividends to shareholders, it is not usually expected of smallbusinesses.Long Term Debt will be available in rounds one and four. This financing option will require teams to pay interest onthe amount borrowed, and pay the money back over a period of years. The interest rate and payback period increasewith the amount borrowed. Teams should be sure to check the impact on their pro forma income statement’s interestexpense and pro forma balance sheet’s liabilities section.Starting in Year 3, teams will have the option of using short-term financing. The amount a team may borrow is basedon their company’s Accounts Receivables, Inventory, and Total Fixed Assets. This financing option is a line of credit,meaning that they will be able to borrow up to a limit, but will have to pay interest on the amount borrowed. Theinterest rate will be 3% - 6.5%. Teams should use this option to ensure that their business will have adequate workingcapital for the year.Should a team’s business run out of cash, they will be forced to borrow from an emergency line of credit at veryexpensive rates. It is crucial that teams spend adequate time analyzing their high and low sales estimates to ensure thattheir company has adequate liquidity in a worst-case scenario. PRODUCTIONThe Production panel is where teams will make decisions about how much beer to produce, how much of each beertype is divided between their selected packaging options, the ingredient quality of their products, and the prices of theirproducts.Teams won’t actually start producing beer until Year 2. At the top of the production panel, they will select the numberof production cycles for each production machine. Each cycle will produce 100,000 liters. Ale machines will be able toproduce up to 15 cycles in a year (1.5 million liters), and lager machines will be able to produce up to 9 cycles in a year(900,000 liters). Teams can see the total output at the bottom of the panel.Teams can select the percentage of output desired for each packaging option in the Packaging section. Only packagingoptions that were purchased by a team can be selected. The fields directly below the packaging control options willautomatically display how many actual units of each product will be produced based on the current Production Cyclesand Packaging decisions.Starting in Year 5, a team will have to make decisions about product ingredient quality and price. Ingredient quality isthe most important determinant of the cost of goods sold. High-quality ingredients will cost more than low-qualityingredients, resulting in a lower margin with everything else held constant. However, higher quality products sell for a 9
  10. 10. premium price. Teams should be sure to carefully read the market information to determine what level of qualityconsumers are looking for.Pricing is a critical decision point. If the price of a product is too high, customers will purchase competitors’ beers. Ifthe price of a product is too low, the beer will be sold but teams will lose money from not having priced appropriately.It is critical that teams spend the time to make good pricing decisions based on the market information provided. HUMAN RESOURCESAs a business grows, it will have to bring on additional employees and specialists. Each of these workers increasesoperating expenses, but understaffing can have a very detrimental effect on a business’s ability to produce and sell beer.The number of people in each position is driven by different factors, including projected sales and output. A generalguideline for hiring is provided in the market information report. Use the quantity selection boxes to choose thenumber of employees for each section. Teams will see the per-person expense and the total expense for each position.The starting value of each position is carried over from the previous year. OTHER SPENDINGThe Other Spending Panel is where teams will make decisions about key discretionary spending, including marketing,product development, promotional activities, and community development. These spending amounts are determinedas a percentage of forecasted revenue. The total forecasted revenue and projected amount for each category ofspending are included in the drop down selection box. Use the provided market information to make the best decisionfor the current round.SIMULATOR SCORING METHODOLOGYAs noted above, after each round the teams will receive their actual financial results as well as a balanced scorecard.This scorecard reflects how close a team’s decisions were compared to the Best Case Scenario decisions. There aremultiple areas over which the teams are scored. The best possible score for each category is 100. The further awayfrom 100, the worse the team’s decisions were compared to the Best Case Scenario. The purpose of this scorecard is tohighlight areas or decisions that a team should review and focus on more during the next round. A basic description ofhow each score is calculated is provided below: • Production Efficiency Score – The Production Efficiency Score is the proportion of what you actually produced compared to what you planned to produce. The primary factor that determines your production efficiency is having sufficient staff. If you have too few workers, you will not be able to produce the planned amount of beer. If you have too many workers, you will be able to meet your production targets, but you will have unnecessarily high expenses related to salary and wages. • Sales Performance Score – The Sales Performance Score compares your actual sales to your planned sales, as well as your actual sales to the Best Case Scenario sales. It is important to remember that you cannot perform better than the Best Case Scenario, so use them as a gauge to see if your market demand forecast is too high or too low. • Financial Health Score – Using your actual financial results, the Financial Health Score uses five key ratios that measure financial health, and compares your results to actual industry averages. If your business’s financial ratios are worse than the industry averages, your scores will drop. If your business’s financial ratios are better than the industry averages, you will have high scores. The scores will be low for the first few rounds as your business works to enter the market and become profitable. If you are doing a good job of managing your business, the overall Financial Health Score should be above 80 by the third or fourth year. • Employee Morale Score – Employee Morale is governed by two things: your company’s actual sales performance and staffing decisions. Falling short of planned sales goals is bad for morale and will cause the score to decrease. If you don’t have adequate staffing, your workers will have to work overtime, causing the score to decrease. • Working Capital Management Score – The Working Capital Management Score is related to having enough cash to run your business. The only time that this score will drop is if the business runs out of cash and has to draw from the Emergency Line of Credit. The larger the draw, the lower your score will be. To avoid this, it is very important that you make sure that your business will have enough cash if you do not meet your sales projections. You should plan for the best case, but financially plan for the worst case. 10
  11. 11. • Brand Strength Score – Managing your company’s brand is very important. The Brand Strength Score is a measure of your overall brand management and is comprised of your discretionary spending, packaging, price to quality, and brand consistency scores. - Discretionary (Other) Spending – Spending less than the Best Case Scenario will cause the Discretionary (Other) Spending Score to decrease. It also has an adverse effect on sales. Spending more than the Best Case Scenario will not hurt your score, but you will have to pay higher, unnecessary expenses. - Packaging – This score is calculated by comparing your packaging allocation decisions to the Best Case Scenario. Significant deviations from the Best Case Scenario will cause this score to drop, which will negatively impact your sales. - Price to Quality – Your pricing should correspond to the quality of your product. For example, selling a low- quality product at a premium price will cause this score to decrease. Correct pricing is very important. Pricing too low will sacrifice potential sales, while high prices will decrease demand for your products. - Brand Consistency – Strong brands are derived from consistency. Having a similar product from year to year means maintaining roughly consistent prices, ingredient qualities, and packaging decisions between years. • Managerial Effectiveness Score – The Managerial Effectiveness Score is a composite of all the other scores, as well as the Managerial Effectiveness Scores from previous years. This means that you must make consistently good decisions to maintain a high Managerial Effectiveness Score. ____________________________In the pages that follow, you will find a list of what decision points are to be made by the team in each round, therecommended training courses to be given to the students before starting the round, the market information (theinformation included in the business simulator to inform the various decisions), and an explanation of how theinformation ties to the Best Case Scenario outcome. The users of the business simulation program should not beallowed to view the following explanations, as it will outline the correct decisions and remove the opportunity for themto make strategic decisions as a team. However, these explanations are useful for the facilitator of this course as it givesyou a prescient perspective as to what particular decisions might have impacted a team’s performance.The information is divided into six sections, as there are six rounds (years) in the business simulator. Text related to theinterpretation of the market information will be marked as a “Facilitator’s Note” in a gray box. This has been done asfrequently as possible to allow the facilitator to work with the students and help coach them through the game.After each round of the game, facilitator’s are encouraged to give the students an opportunity to present what decisionstheir team made and what their overall strategy is for their business. This can be accomplished informally through asimple classroom discussion or more formally by having each team prepare PowerPoint presentations and practicetheir public speaking skills in front of the rest of the class. The easiest way to facilitate these reviews is go through eachdecision point in the most recent round (which are listed in the pages that follow) and have each team describe howthey approached the problem. The facilitator may also ask questions about how the team worked together and whatkind of group dynamics the students are observing amongst themselves. 11
  12. 12. YEAR ONE: MARKET SUMMARYDecision Points To Be Completed In This Round: • Machinery Acquisition: number and type of “brewing machine sets” to purchase (maximum of 5; ale and/or lager choices) • Packaging Acquisition: type of packaging machinery to purchase (keg, bottle, and/or can) • Finished Goods Storage: investment in inventory storage area based on a percentage of annual output • Financing: how much debt and/or equity will be used to finance the companySuggested Training Courses To Include: • Vision and Mission Statements • Market Analysis and SWOT • Startup Capital • Essential Microeconomic Principles • Microsoft Excel 1: Excel Basics • Microsoft PowerPoint 1: PowerPoint BasicsMarket Information Included in Business Simulator and Facilitator Notes:Welcome to Megapolis, a community of business opportunity and growth! With a population of 400,000, Megapolis isneither large nor small. However, being located within 20 kilometers of other medium-sized communities makes it acentral location for regional trade and commerce. The city’s main industries are food and personal services firms,though there are very few goods produced locally. The city also has a handful of growing technology services firmsthat attract young professionals from around the region and also a small aluminum ore mining operation on theoutskirts of the community. Of the food and personal services firms, there are 20 local restaurants serving varioustypes of cuisines, 45 markets of varying sizes (including 4 large chain supermarkets), and 5 hotels. With a per capitaincome of $30,000, the residents of Megapolis have a comfortable standard of living, often visiting restaurants 3-5times a month and frequently hosting parties for friends and family. Thanks to local tourist attractions, the hotels in thecommunity serve large groups of foreigners every season of the year.The local city government has become increasingly interested in developing Megapoliss tourism offerings. Thisdevelopment plan includes large infrastructure projects, investment and subsidy opportunities for additional restaurantand hotel businesses, and the construction of a large sports/entertainment venue in the coming ten years. IncreasingMegapoliss international reputation and attracting visitors from around the world is the primary goal of the program,but secondary and tertiary goals are local SME economic development and job creation. The various elements of theplan will be fully implemented in the next ten years, with various projects being completed in a phased manner over thecourse of that time as the local government adjusts its budgetary priorities. Facilitator’s Note - The key pieces of information to consider are: • The city’s population • Major industries and types of business • Plans for future development of the cityAfter reviewing the opportunities in your community, you have decided to open your own business. You’ve been doingsome market research on the demand for locally brewed beer in your community and the broader region. You haveconducted interviews with various restaurant owners and beverage distributors, reading market reports from beverageindustry associations, and doing research on the internet. Based on the information you’ve gathered, you have come upwith a general understanding for the beer market in your community and region. Given the number of restaurants, theaverage per capita income, and the diversity of competitors, you have decided to open a beer brewery.Before make any decisions about the size and scope of your brewery, you need to understand a bit more about beer ingeneral. Most beer is brewed using the same process and similar ingredients. The four main ingredients are water, astarch source (such as malted barley), yeast, and a flavoring (such as hops) – the purpose of each is listed below: 1. Water undergoes a multi-stage filtration process to assure purity, quality, and consistency. 2. Malted barley provides the fermentable sugars that add the sweetness to beer. Soaking barley kernels in water, germinating the seeds, drying them in a kiln, and sometimes even roasting them make the malt. There 12
  13. 13. are many different types of malts that produce different tasting beers depending on the roasting process and temperature. 3. These two yeast strains also affect the flavor of the brew by imparting a unique fermentation character. Ale yeasts ferment at warmer temperatures and typically ferment faster with a fruity fermentation character. By contrast, lager yeasts ferment at cooler temperatures for a longer period of time and impart savory and complex flavor. 4. A hop is a flower that looks like a little soft pinecone and grows on a long vine. These flowers are almost exclusively used for beer. Hops are to beer what grapes are to wine.The brewing process for most beers follows the same sequence of actions. The main steps of the brewing process aremalting, milling, mashing, lautering, boiling, fermenting, conditioning, filtering, and packaging: 1. Malting - Malting is the process where the barley grain is made ready for brewing. The malting process consists of three stages: steeping, germination and brewing. Together this step takes about seven days to complete. 1. Milling - This is when the grains that are going to be used in a batch of beer are cracked. This step typically takes one day. 2. Mashing is the next step in the process. This process converts the starches released during the malting stage, into sugars that can be fermented. The milled grain is mixed with hot water in a large vessel known as a “mash tun”. In this vessel, the grain and water are mixed together to create a cereal mash. Mashing usually takes half of a day to finish. 3. Lautering - The result of the mashing process is a sugar rich liquid or "wort" (pronounced wert), which is then strained through the bottom of the mash tun. Lautering can be finished in a half-day. 4. Boiling - The wort is moved into a large tank known as a "copper" or kettle where it is boiled with hops and sometimes other ingredients such as herbs or sugars. This stage is where many chemical and technical reactions take place, and where important decisions about the flavor, color, and aroma of the beer are made. The boiling takes about half of a day to complete. At the end of the boil, the hopped wort settles to clarify in a vessel called a "whirlpool", where the more solid particles in the wort are separated out. After the whirlpool, the wort then begins the process of cooling. This is when the wort is transferred rapidly from the whirlpool or brew kettle to a heat exchanger to be cooled. After the wort goes through the heat exchanger, the cooled wort goes into a fermentation tank. 5. Fermenting - When the yeast is added to the wort, the fermenting process begins, where the sugars turn into alcohol, carbon dioxide and other components. Fermentation normally takes about 5 days. 6. Conditioning – This is the process in which the beer ages and the flavor becomes smoother. After conditioning for a week to several months, the beer enters the finishing stage. This is the step with the greatest variability in completion time. You have found that most ales take about three weeks to condition whereas lagers take about 35 days. 7. Filtering - Filtration also helps to stabilize the flavor of the beer. After the beer is filtered, it undergoes carbonation, and is then moved to a holding tank until bottling. These steps usually take one day to complete. 8. Packaging – Once the beer has completed its filtration, it awaits transfer to bottles or kegs, which can be done in half a day.You’ve found that most people in Megapolis consume 80 liters of beer per capita on an annual basis. The populationof Megapolis is 400,000, which translates into total consumer demand of 32 million liters annually for all types of beer.There are three general types of beer consumed in Megapolis: ales, lagers, and stouts. Ales account for the majority ofdemand. In the past five years, revenues from ales have accounted for 85-92% of the total market for beer. Using theestimated beer demand figure of 32,000,000 liters, this would result in 27.2 – 29.44 million liters of ale consumed peryear. The remaining two categories – lagers and stouts – have been about equal in their share of the remainder of themarket. However, you also noticed that the actual selling price (ASP) for lagers and stouts tends to be higher than ales,since both are considered a “premium” product.While there seem to be many reasons for the popularity of ales, interviews with local restaurant and store owners haveinformed you that one of the reasons ales have historically been popular has been the lack of availability for other typesof beer. These business owners seemed to be interested in diversifying their products, but were unsure how consumerswould react. During your research, you held many conversations with friends and family about their attitudes andpreferences towards to beer. Further, many of the market reports you’ve read had interesting statistics from consumer 13
  14. 14. surveys and studies. One statistic noted that 90% of beer consumers were very interested in trying new types of beer.Another showed that 50% of consumers are satisfied with the current beer options in the community.Your friends and family affirmed many of the assertions of these market reports, though believed that many peoplewould strongly value beer that was produced locally, regardless of type. Given the size of the ale market, there aremany different producers, though there is no clear market leader and the competition is quite fragmented. Only a fewbreweries, on the other hand, produce lagers and stouts, and their products need to be imported to Megapolis. Overall,your brewery will be a new entrant to the market and it may be difficult to take market share away from marketsegments where there are many existing beer producers. Industry resources have suggested that in highly competitivemarkets, such as that for ale, a new entrant may never control more than 5-8% of the market. However, for burgeoningmarkets where a new or existing product category is growing rapidly and there are few competitors, an aggressive andsavvy producer may build up a much larger share. Facilitator’s Note - The key pieces of information to consider are: • Ales currently dominate the market, though various sources indicate that this might not be to consumer preference but rather due to the lack of supply. • Lagers and stouts are viewed as premium products and are typically sold at higher prices. • Consumers value products that are made locally. • Ales are a highly saturated market, while lager remains undeveloped. There is a greater opportunity for growth in this segment as there is less competition.A number of these market reports also forecast future trends for the beer industry, including growth and marketsegmentation. While much of this analysis is speculative, it is the only information you have about where the beermarket is headed in the next five years. While all the reports agree that, overall, there will not be much growth for thebeer industry in Megapolis, the analysts have very different opinions about how the market segmentation will shift inthe coming years. You found the following graphs in each of the reports: Each report has a different perspective on the direction of the beer market. It appears that lagers and stouts will grow as market categories, though each report’s rate and timeframe differ. Each report defends its conclusions and cites all the assumptions used in creating these forecasts. Since you do not currently have the time or resources to do a market study of your own, you decide to check the credibility of each report source so that you can use the most educated and unbiased data to make your decisions. You find that Company B is actually funded by the National Association of Ale Brewers, which leads you to believe that the opinion of the report might be a little skewed. CompanyC’s report is the most recent, but it only forecasts the market for the next three years. Company A’s report is one yearolder than Company C’s, but was conducted by a regional university’s marketing department to assess consumerpreferences in the beer market. 14
  15. 15. The capacity for a microbrewery is typically measured in the annual capacity of liters produced. You have only foundone company that sells beer-brewing equipment, but there is a very limited selection. They have two types ofequipment: one for brewing ales and one for brewing lagers. The maximum amount that can be brewed in a singlebatch with this equipment is 100,000 liters. Based on the differences in the brewing process, you have estimated thetotal time to process a single batch is different for ales and lagers: ales take 37 days and lagers take 51 days (plus oneextra day for cleaning the machines after each cycle). However, since the different steps in the brewing process usedifferent equipment, you are able to start a new batch before the second one is fully finished. Using cycle time analysis,you figure out that an ale machine could produce 15 batches of beer annually (1,500,000 liters) and a lager machinecould produce 9 batches annually (900,000 liters). Using the total demand figure for beer of 32 million liters, one alemachine’s maximum output would account for 4.7% of total beer demand, whereas one lager machine’s output wouldaccount for 2.8% of the total beer demand. However, note that ales and lagers account for vastly different shares of thebeer market. In your calculations, remember that the maximum potential market share captured by an ale machine inthe ale segment or a lager machine in the lager market will be quite different. The total cost for one ale-brewingmachine (including all the necessary equipment) is $150,000; the total cost for a lager-brewing machine is $200,000.You have decided to purchase somewhere between one and five brewing machines. Before you make your purchasingdecision, you should think about what information you have gained from your market reports and what trends youexpect in the coming years. You might not have the opportunity to purchase additional machines for 3-4 years, so it isimportant you that you make a well-informed decision now. Facilitator’s Note - The key pieces of information to consider are: • The students should focus on the biases of the three companies that produced the market reports. • The maximum potential market share captured by an ale or lager machine is calculated as follows: Total Potential Output / Total Demand for the Corresponding Market Segment • In deciding how many machines to purchase, the students should consider 1) how a change in the demand for a particular type of beer would affect the calculation above (market trends), 2) what percentage of demand (market share) a new brewery could reasonably be expected to capture, and 3) the teams will not have an opportunity to purchase additional machinery for a few years so the future of the brewery should be discussed.Now that you have made your brewing machinery purchasing decision, you have to think about what types ofpackaging equipment you need to buy. Based on market reports and personal observation, you have noted that about70% of beer consumption happens in public places, such as restaurants and bars. The remaining 30% occurs privatelyin people’s homes. Public places, like restaurants, tend to purchase beer in the form of kegs and bottles. A keg contains64 liters of beer per unit. A bottle contains ½ liter per unit. Stores, however, do not sell kegs; they only sell bottles andcans. A can contains 1/3 liter per unit. You have noted that different beer vendors usually sell their product in at leasttwo of the three packaging options (kegs, bottles, and cans). Regardless of whether consumers are drinking at arestaurant or purchasing beer at a store, there seems to be a fairly even split between the packaging options available.The same vendor that sold you the brewing machinery has the necessary equipment for each of the three packagingoptions. The keg-packaging equipment costs $30,000, but the equipment for both bottle and can packaging costs$40,000 for either option. You need to decide what packaging options to invest in. Facilitator’s Note - The key pieces of information to consider are: • Restaurants purchase kegs and bottles, whereas stores purchase bottles and cans. Typically, consumers prefer kegs equally to bottles when dining at restaurants and bottles equally to cans when shopping at stores. All three packaging options are important pieces of consumer demand and preference.Now that you know how much machinery you are purchasing, you can decide what size warehouse you will need toproduce your beer. You found one nice location in an industrial part of town. The total available space is more thanenough to accommodate any beer brewery, but the landlord has agreed to rent you only as much space as you need ifyou sign a 10-year lease. You decide this is a great option because it allows you additional space to grow if you purchasemore brewing equipment in the future. The owner of the property has some experience with brewing and has givenyou information on how much space you will need. In order to calculate the total number of square footage necessary,he has broken down your operation into four aspects: general office space, storage of raw materials (the ingredients for 15
  16. 16. your beer), floor-space for brewing, and storage of finished goods (packaged kegs, bottles, and cans ready for sale). Theprice per square foot is $5.00. This price will be adjusted annually for inflation.You and the landlord have estimated that you will need 1,000 square feet for office space. For storage of raw materials,the landlord tells you that your storage space will depend on how many liters of beer you could potentially producewith the machines you purchased. The more you can produce, the more space you will need to store ingredients. Interms of floor space for flooring, the equipment vendor said that you would need 1,750 square foot for every brewingmachine purchased. This will be enough for the brewing and packaging of the beer. The landlord and you agree onthis point.The last decision for your warehouse will be how much space you need for storing finished goods. You and thelandlord cannot agree on a specific amount, so you decide to look at how much space your competitors typically use.Much like the logic for how much raw materials storage space is needed, this calculation will depend on how muchbeer you could potentially produce. However, the space needed will also depend on how quickly you can sell anddistribute your beer after it has been packaged. By reviewing the financial statements of other breweries, you decidethat the best way to come up with a decision is to compare the Finished Goods Inventory on their balance sheets totheir production levels. You find that it can range from 2-10%, but that most breweries have 5-8% storage capacity.You need to decide what percentage of your maximum potential production you will use to set the rental fee for thisaspect of your brewery. You do not want to have too little space, because you might have to stop production if youthere is not enough space to store your goods. On the other hand, if you have too much you will be paying for floorspace you don’t need. Facilitator’s Note - The key pieces of information to consider are: • Rent will increase depending on how many brewing machines are purchased and what type they are, since rent is partially tied to maximum potential output and an ale machine can produce more than a lager machine. • For finished goods storage space, the students should focus on the average range of most other breweries.Now that you have decided how much you are investing in machinery and your estimated annual rental cost, youshould start thinking about how much financial capital you will need to get your brewery started.In addition to the capital investment and rental expense, there are other costs and factors to consider. First, you shouldconsider that most new businesses do not make a financial profit for the first few years of operation. In other words,your business will probably be cash flow negative in the near future. Second, there are additional costs that yourbusiness will incur. During the next year, you will be focused on constructing the brewery and ensuring that all themachinery is functional. You have determined that you can do all this work yourself, so yours will be the only salaryexpense during the first year. You do not expect to produce or sell any beer in the first year. However, you will beginproduction next year, which will require you to build up a full-time staff as your production volume grows. There arealso other expenses that will be minimal in the first year, but will grow as time passes and you begin production. Theseinclude utilities (gas, electricity, water, phone, internet), fuel expense (for distributing the finished beer to yourcustomers), marketing expense, product development expense, promotional activities expenses, and communitydevelopment expense. You also plan to invest $50,000 this year in general office equipment such as computers andfurniture. Facilitator’s Note - The key pieces of information to consider are: • Students should determine the amount of financing needed by taking the sum of 1) total cost of brewing machines, 2) total cost of packaging machinery, 3) annual rental expense (for at least two years), 4) an estimate of other general operating expenses (for at least two years), and 5) the $50,000 being used for general office equipment. • As the brewery will not be operational in the first year, the students should consider the impact of no cash flow from sales until the second year of the game. It is common for a new business to have a net operating loss for the first few years of operation, which should also be considered in the decision-making process.Now you must decide how much and what mix of debt and equity financing you will pursue to fund your brewery untilyou begin making a profit. You have spoken to your local bank about debt financing options. The bank has agreed to 16
  17. 17. let you borrow up to $2,000,000 in the form of a long-term loan. However, the amount borrowed will affect theinterest rate and how quickly you must pay back the loan. As the amount increases, there is more risk to the bank thatyou and your business might not be able to pay back the loan. The interest rate for your long-term loan may rangeanywhere from 8-14%, depending on the amount you decide to borrow. Additionally, since you have significant ties tothe community and personal assets to serve as collateral, the bank has agreed to supply you with a line of credit. Thisline of credit has much higher interest rates (up to 22%) so you decide that this will be your emergency source offunding in the event that you run out of money from other sources.In addition to these debt options, you have gathered the financial support of your friends and family. Along with yourpersonal savings, you have been able to gather commitments to invest up to $1,500,000 in your business. While there isno interest expense for this type of equity financing, you give up some control of your business by having manyinvestors. Investors expect to have a vote in the direction of your business since it was their money that helped start it.Since these investors are mostly close friends and family, you don’t expect there to be too much trouble but it issomething you should be aware of.First, you need to estimate your total financing need. It is always nice to have extra cash around, but there can also beproblems with raising too much capital for a new business. If you take on too much debt, you will be paying moreinterest expense that you need to. If you take on too much equity, you might have people trying to manage yourbusiness or take it in a different strategic direction. However, no business can succeed without financial resources, soyou also want to make sure you have enough cash to get you through the next few years until you will hopefully bemaking a financial profit.After you have figured out how much cash you need, the next step is think about what mix of debt and equity you aregoing to use. You decide to analyze the financial statements of other breweries to see what their financing strategy hasbeen. By looking at their balance sheets, you can see how much debt financing each brewery has compared to howmuch equity financing they have used. Using the relationship of debt financing to equity financing in the most recentyear, you find that, on average, most brewers have about $0.50 of debt for every $1.00 of equity financing. For eachbrewery you analyzed, you also decide to look at their past financial records (last five years) to see if this same ratio wasfollowed. You have found that for every $1.00 of equity capital, other breweries have had anywhere from $0.30 - $0.80of debt financing. While there seems to be some variability, looking at the trends of your competitors helps give you anidea of what financing strategy you should use for your brewery. You decide that you should use a mix of debt andequity capital to fund your brewery, but need to decide how much of each is the appropriate amount. Facilitator’s Note - The key pieces of information to consider are: • Based on the amount of financing necessary for each team (see previous Facilitator’s Note), the teams have the opportunity to use a combination of a long-term loan (maximum amount of $2,000,000) and equity (maximum amount of $1,500,000). • Teams should consider the debt-to-equity ratio of the peer group in deciding how much debt and equity to use for their businesses. • While it might seem like the best option to take the maximum amount of debt and/or equity, excessive financing places undue strain on the business. Extra debt will need to be paid back and, if it was never used, the teams will still have paid interest for its use. Extra equity will reduce Earnings Per Share, which is a measurement of how much each investor receives for contributing capital to the business. • There is an emergency line of credit that has very high interest rates and is only used in circumstances where a team’s business has a negative cash balance. The students cannot elect to use this line of credit on their own and it should be viewed as a penalty for failing to properly forecast the cash needs of the business. 17
  18. 18. YEAR TWO: MARKET SUMMARYDecision Points To Be Completed In This Round: • Production Capacity: total cycles run for each brewing machine • Packaging Allocation: amount of output packaged as kegs, bottles, and/or cans • Amount spent on Marketing, Product Development, Promotional Activities, and Community DevelopmentSuggested Training Courses To Include: • Market Research • Simple Forecasting • Introduction to Managerial Economics • Placement and Promotion • Microsoft Excel 2: Data Entry • Microsoft Word 1: Word BasicsMarket Information Included in Business Simulator and Facilitator Notes:For the past year, you have been very busy purchasing and installing equipment, getting the necessary licenses andcertifications to operate a brewery, and fine-tuning the brewing process. With everything in place, you are now ready tostart producing and selling your beer. Entering the beer market as a new competitor will require a very sound strategicplan. There are many variables to consider and decisions to make, including pricing levels, staffing, production volume,and many others. For this year, many of your friends have offered to be your staff and you have agreed to pay themmarket rates in return for their service. Since many first-year businesses face considerably volatility, having your friendsserve as your scalable work force seems like a smart option.You first decide that your strategy should be focused on understanding your competitors. You decide to create twocompetitor matrices: one for the ale market and one for the lager market. You take into account the selling price ofcompetitors’ beer, the relative quality, and their total sales in each particular segments (based on their financialstatements for the previous year). In the graphs below, each circle represents a different competitor. The size of thecircle represents each competitors’ revenues from the previous year relative the rest of the competition; larger circlesrepresent companies with more sales than the others. The vertical axis represents the relative price of the beer; thelower the circle, the lower the actual selling price of that company’s product. The horizontal axis represents the relativequality of the beer; the circles towards the left of the chart are considered low quality, whereas those to the right areconsidered high quality. In developing your strategy for entering the market, you should focus on a combination ofprice and quality that does not strongly overlap with any particular competitor. Based on these charts, it appears thatthere would be an opportunity for a medium-quality, medium-priced ale and either a high-quality, medium-priced lager. Competitive Matrix: Ale Market Competitive Matrix: Lager Market Facilitator’s Note - The key pieces of information to consider are: • The charts above are meant to draw attention to the best points market entry for a new brewer. In the ale category, the best strategy is to brew a medium-quality, medium-priced ale. In the lager category, the best strategy is a high-quality, medium-priced lager. These are the best strategies due to the lack of primary competition for similar products, as illustrated in the charts above.You also did some research on the relative price ranges for ales and lagers across the three packaging types (kegs, cans,and bottles). Note that these prices reflect the amount paid by restaurants, bars, stores, and supermarkets to beer 18
  19. 19. producers. Recall that a keg holds 64 liters of beer, a bottle holds one half of a liter, and a can holds one third. Since it would be hard to compare the price of a keg to that of a can, you decide to look at the price range for each category on a per-liter basis. Kegs seem to have the lowest per- liter selling price, which seems reasonable since purchasers of kegs naturally pay for a higher quantity of beer. Cans have the most expensive price per liter. Further, it appears that most lagers sell at a premium to ales and have a slightly wider pricerange. Last year, 32 million liters of beer were consumed in Megapolis. Given the prices and quantities noted above,you estimate that the total market for beer was $30.0 - $57.6 million last year, depending on what mix of kegs, bottles,and cans were sold and at what price point for each.Of the 32 million liters of beer consumed last year, sources indicate that 90% were ales, 5% were lagers, and 5% werestouts. If these sources are correct, then 28.8 million liters of ale, 1.6 million liters of lager, and 1.6 million liters ofstout were purchased and consumed last year. You remember that the market reports you purchased last yearsuggested that the market would begin to shift towards the consumption of lagers and stouts, but at what rate and overwhat length of time you do not know. However, you can be fairly confident that there will be less than 28.8 millionliters of ale consumed this year, with the difference leading to an increase in the lager and stout market segments.As you get ready to enter the market, perhaps one of the most important things to do is prepare a production forecast.This implies determining how many liters of beer you are going to produce, which is determined by how many cyclesper machine will be run during the year. In order to develop your production forecast, you decide to create best-caseand worst-case scenarios in terms of market share for a new brewer. The two factors you focus on the most are theamount of competition and the overall growth prospects for each market category. You have found that there aremany competing producers of ale, which can be expected given the fact that ales have dominated the beer market formany years. While there are many competitors, there is no clear leader; the largest producer controls only 20% of themarket. You consider this to be positive, since it would be much more difficult to penetrate the market if onecompetitor controlled upwards of 50% of the total supply. However, market forecasts suggest there is little room forgrowth in the ale market (beyond the inflation rate). In fact, all the reports suggested a decline in ale consumption overthe next ten years. Conversely, the lager market is much less competition and higher prospects for growth.Each one of your beer machines can brew 100,000 liters per cycle. If demand for beer in the coming year were toremain at 32 million liters, 100,000 liters would represent 0.3% of the market. After running some different forecastmodels, you believe that you could expect to capture 2-6% of the ale market and 5-11% of the lager market. However,your penetration rate will depend on how skillful you are marketing and promoting your product, how well youforecast consumer preference for packaging, and the way the overall beer market goes with respect to ales, lagers, andstouts. You need to decide which machines you are going to run this year and how many cycles would need to bebrewed to represent a reasonable market share for your products. Facilitator’s Note - The key pieces of information to consider are: • Ales accounted for 90% of consumer demand last year, but are going to shrink overall in the coming year. Lagers are going to continue to grow as a market category. • When teams decide how many cycles to run for each machine, they should consider how much of the market would be captured by producing that much beer. For example, if a team produces 3,000,000 liters of ale, this might equate to over 10% of the market. It is highly unlikely that a new brewery could capture that much of the market in the first year of operations. The information states that a new brewer could expect to capture 2-6% of the ale market and 5-11% of the lager market, depending on how accurate other decisions are made. Teams should use this market-based approach towards their production planning. 19
  20. 20. Once you have determined how much beer will be produced in the coming year, it is time to decide on the split between packaging options. Your local Chamber of Commerce recently reported that citizens of Megapolis continue to enjoy a reasonably high standard of living and tend to eat out at restaurants and bars frequently. As you were doing some research on the internet, you came across the following chart that illustrates the breakdown of consumer purchasing patterns depending on where they consumed beer. Though it is a few years old, the report seems to be from a good source and you have no reason to believe that there have been any dramatic changes in consumer behavior since then.From your own experience as a consumer, your preferences run similar to the chart above with one exception: youtend to prefer lagers from a keg or bottle, rather than a can. You read in a beer trade magazine that the aluminum incan packaging does not keep lager’s freshness as well as kegs and bottles. As a result, lager from cans tends to taste verydifferent than the same lager from kegs or bottles. There is no discernable difference in the taste of ales between kegs,cans, and bottles, though. This leads you to believe that the chart above might serve as a good starting point fordeciding on how to package your beer.One aspect you need to consider is that you are a new competitor in the market and consumers will not be familiarwith your beer. You need to think of every way possible to increase the amount of exposure to your product. Whilesupermarkets and stores do have customer at all hours of the day, not all of them will pass by the beer section. Theirstaffs are also unlikely to promote your product themselves since they do not benefit by doing so. Further, most peoplego to supermarkets already knowing what it is they are going to purchase, which reduces the probability of thempurchasing a product they are not familiar with. Aside from supermarkets and stores, the other large purchasing groupsfor beer are restaurants and bars. If you were to sell your product to restaurants and kegs at a slightly reduced price, ordiscount, the managers and staff might try harder to sell your product to patrons. Based on the data above, you need todecide how you will divide your beer output between kegs, bottles, and/or cans. Facilitator’s Note - The key pieces of information to consider are: • Overall, the chart shows that keg packaging accounts for 47% of consumer demand, bottles account for 41%, and cans account for 12%. Note that this is for the beer market in general and that the preferences for ales or lagers will differ. However, since ales have dominated the market over the past few years, the chart is an accurate depiction of ale preferences. • Consumers typically prefer to drink lagers out of a keg or bottle, rather than a can.While certain expenses, such as rent and staffing, are dependent on how much beer you are producing, there are otherexpense categories that are at your discretion. These include Marketing, Product Development, Promotional Activities,and Community Development. Marketing expense and Promotion Activities includes actions related to advertisingyour product, including website development, print advertisements, television commercials, etc. as well as specialevents, contests, and prizes that provide incentives for customers to try your product. For a new beer competitor,marketing is very important since it aids consumer awareness for your product.Product Development expense determines how much you spend on experimenting with the brewing process todevelop a better-tasting beer. It may happen that consumers do not like the exact type of beer you brew, due to thetypes of levels of ingredients used. An investment in Product Development will help tailor your beer to suit customers’preferences and ensure the highest-quality beer relative your capabilities. Since you do not have any direct consumerfeedback yet as it is your first year brewing, you think this might be an important expense.Community Development expense is related to how much you give back to the citizens of Megapolis throughcommunity improvement projects and donations to local charitable organizations. It is important to help yourcommunity and it also serves to create a positive reputation for your business as being socially responsible. 20

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