2. CONTENTS
I. MARKET INFORMATION .................................................................................................................................................. 4
1. OVERALL CONTEXT.................................................................................................................................................................... 4
2. COMPETITION.......................................................................................................................................................................... 4
3. COOPERATION......................................................................................................................................................................... 4
4. ADMINISTRATIVE DEPARTMENT................................................................................................................................................... 4
5. SALES FORCE ........................................................................................................................................................................... 5
6. ADVERTISING........................................................................................................................................................................... 5
7. PRICING ................................................................................................................................................................................. 5
8. QUALITY................................................................................................................................................................................. 5
9. CERTIFICATION ........................................................................................................................................................................ 6
10. POSITIONING STUDY ............................................................................................................................................................. 6
II. PRODUCTION................................................................................................................................................................... 7
1. TECHNOLOGIES ........................................................................................................................................................................ 7
2. PRODUCTION ORDER................................................................................................................................................................. 8
3. PRODUCTION LABOR................................................................................................................................................................. 8
4. RAW MATERIAL SUPPLY ............................................................................................................................................................. 8
5. THE SPOT MARKET.................................................................................................................................................................... 9
III. CONTRACTS................................................................................................................................................................... 10
1. RAW MATERIAL CONTRACT....................................................................................................................................................... 10
2. SUB-CONTRACTING CONTRACT.................................................................................................................................................. 10
3. DISTRIBUTION CONTRACT......................................................................................................................................................... 10
4. TRANSACTIONS COSTS ............................................................................................................................................................. 11
5. CONTRACT ADMINISTRATIVE COSTS AND CONTRACT DEPARTMENT.................................................................................................... 11
6. CONTRACT MODIFICATIONS...................................................................................................................................................... 11
IV. FINANCE.................................................................................................................................................................... 12
1. INTER COMPANY CREDIT .......................................................................................................................................................... 12
2. DIVIDENDS............................................................................................................................................................................ 12
3. LOANS ................................................................................................................................................................................. 12
Long-term loan ............................................................................................................................................................. 12
Short-term loan............................................................................................................................................................. 12
Overdraft....................................................................................................................................................................... 13
Purchase and sales of notes.......................................................................................................................................... 13
V. APPENDIX : ECONOMIC CONTEXT – PERIOD 1 ............................................................................................................... 13
3. INTRODUCTION
GAÏA is a simulation in which team members run virtual companies by taking decisions in a
dynamic competitive environment. Each company belongs to a given country (USA, China or
Europe). As a consequence, the size, the economic and social profiles of these companies are
different even though they manufacture and sell the same type of product.
According to the country they are coming from, companies do not have similar strengths or
weaknesses. They also do not experience similar opportunities or threats. As a consequence,
expected results differ from one country to another.
A dedicated set of information related to economic, social and cultural indicators will be made
available within the « economic context » description (available at each period during the
simulation). Team players will thereby have a good understanding of the environment
characteristics of each company.
The specificity of GAÏA is that it encourages cooperation, negotiation and partnership between
companies, whether they belong to the same country or to different countries.
4. I. MARKET INFORMATION
1. OVERALL CONTEXT
The GAÏA simulation features a set of Small and Medium sized companies originating from the US,
China and Europe. Whatever their country of origin, at the beginning of the simulation, all
companies are manufacturing and selling the same finished products. They are only selling within
their own country. This product can be described as a headphone and its unit cost is relatively
low. It is sold to consumers through a network of wholesalers and retailers.
Following a period of solid growth, the product has reached maturity, but significative disparities
do exist between countries. The last fiscal year was favorable and from a competitive
standpoint, all companies enjoyed high results particularly when compared to the overall results
of each country’s industry. However, this favourable situation may change, and new options for
further development may be considered.
Product quality is at the origin of the most important recent market environment change.
Consumers’ requirements as well as international competitive pressure lead this industry, as many
others, to the creation of a product quality formal definition with key criteria to be met (ISO
norm).
2. COMPETITION
Firms from the same country compete directly with each other. They also compete with local
manufacturers.
Competition between firms from different countries occur indirectly when a firm distributes
finished products that were made by a foreign company in its own market (see section III –
contracts).
3. COOPERATION
There are differences from one country to another: the use of different technologies, different
costs, insufficient or spare production capacity, etc.
These differing situations may provide firms from the same and/or different countries with
opportunities for cooperation (see section III – contracts).
4. ADMINISTRATIVE DEPARTMENT
Every firm possesses an administrative department which handles daily operations and
administrative tasks. The total cost of this department depends on the countries and on the firm’s
sales. It can be found in the firm’s income statement and cash flow report.
5. 5. SALES FORCE
In order to reach its final customers, products are sold to wholesalers and retailers through a sales
force headed by a sales manager (whose salary depends on country and sales) and made up
of a certain number of salespeople.
Difficulty in keeping customer loyalty as well as the size of sales areas have led the profession to
pay its sales force fixed wages. Salesmen also have their traveling expenses covered by a fixed
allowance.
In the present organization, changes in the sales force come through the hiring and dismissal of
salespeople. If hiring or dismissals are carried out immediately, the dismissed salesperson leaves
with compensation equal to what he/she cost the firm during the last quarter. There are no hiring
fees.
6. ADVERTISING
Advertising is a key factor, and happens to be as important as the sales force, especially since
the quality of the product has so significantly improved and since distinct differences exist
among the manufacturers.
7. PRICING
Pricing is a very sensitive issue cautiously handled by companies.
However, research and development costs, as well as technology changes have generated
productivity gains rapidly transferred into new pricing. Also, differentiation by quality should be
accentuated by the ISO norm penetration, therefore allowing different pricing positioning.
8. QUALITY
As most industries across the world, this industry engaged into a quality process whose effects are
being perceived.
Firms can significantly increase their products’ quality by engaging proportionaly significant R&D
expenses. The products’ quality is also closely linked to the technology used in their
manufacturing, which itself requires a minimal level of R&D to reach maximum performance.
If R&D expenses are a firm decision, they however have different effects according to the firm
country: in a country where R&D is expensive (ie its R&D index is high), the quality attained with X
€ spent in R&D will be lower than in a country where R&D is cheaper (ie its R&D index is lower) for
the same investment of X €.
6. 9. CERTIFICATION
The certification of a product testifies to the level of quality attained, and more specifically to its
meeting the specifications of these international standards. The National Certification Authorities
(NCA) grants certification in each country. The NCA regularly carries out inspection audits to
monitor compliance, and non observance of certification conditions leads to the withdrawal of
the product’s certification.
ISO norms requirements are such that it is difficult (yet feasible) to satisfy them using T1
technology. T2 and T3 technologies are leading to a higher quality level. However, heavy
research and development efforts are required to maintain a durable level of quality staying
within enacted quality norms.
At each period, the NCA provides indications as to the amount of Research and Development
funds which needs to be committed to have a product certified. See the « economic context
sheet ».
R&D conditions (in quarter 1) for the certification
Technology 1 Technology 2 Technology 3
€ per unit produced 8 € 6 € 4 €
+ Fixed amount 10,000 €
Considering the above table, to have the certifications for a production of 1000 products using
technology 2, a firm must spend at least 6x1000+10000=16000 € of R&D.
To simplify calculations, the specific countries’ R&D index does not apply to the required
certification conditions.
You must pay attention to the delay of one quarter to obtain the certification. A firm is
automatically certified for quarter T if it spent enough in R&D during the previous quarter (quarter
T-1). The « global market » screen is indicating which firms have been certified for the next
quarter (see web site simulation).
10. POSITIONING STUDY
For any given quarter, companies may purchase a positioning study. This study is immediately
available and its cost is 30,000 €.
7. II. PRODUCTION
Manufacturing is done in factories by teams of workers who are supervised by several foremen.
Finished products are currently made by all the companies from raw materials bought from
suppliers.
Sourcing in raw materials is either done on the world market through traders, or possibly through
other firms in the simulation. In this last case “raw material contracts” are negotiated.
Finished products are currently manufactured using a basic technology (T1). This equipment can
be changed during the simulation through the purchase of new technologies (T1, T2, T3).
1. TECHNOLOGIES
At the beginning, all firms (regardless of the country of origin) possess workshops of technology
T1. Starting from period 1, teams may invest into new technologies.
There are currently 3 different technologies (T1, T2, T3) leading to 3 different types of workshops.
These workshops may be acquired but have specific features in terms of investments, production
capacity and cost structure (raw materials, labor, depreciation, R&D expenses).
Technologies 2 & 3 are more capital intensive: they reduce raw material usage as well as labor
cost. However, they require a higher investment at the beginning and in R&D. Price indexes
associated to each country may however have a significant impact that may justify or not the
decision to change technology.
Keeping the production cost structure stable requires a sufficient R&D effort. When a new
technology is acquired, adequate R&D investment is even more important if you are to gain full
control and take full advantage of such technologies. Insufficient R&D investment will
immediately lead to a cost increase for both raw material consumption and labor costs.
Workshop type – technology T 1 T 2 T 3
Base price 216,000 € 1,296,000 € 3,240,000 €
Quarterly production capacity 1,000 u 5,000 u 10,000 u
Attention! The cost information that is given to you corresponds to the conditions on the world
market (i.e. an average situation). The real cost for each firm will depend on price indexes,
which differ from one country to another (see “economic context”).
As a consequence, a technology that it sold for 100,000 € on the world market will be worth
110,000 € in a country where the index capital is 110, or 150,000 € in a country with an index of
150.
Once the decision to buy new technology is made, the technology becomes operational and
thus paid for during the following quarter. A sale of a technology occurs the same way. On the
second hand market used equipment is sold at its residual book value.
8. 2. PRODUCTION ORDER
Production relies over the available workshops. Only the required number of workshops to
generate the specified volume of production are being put to work, starting with the newest
technology. According to country legislation, overtime hours may be allowed.
3. PRODUCTION LABOR
Employees are automatically recruited if needed. Any unnecessary employees are
automatically dismissed, with a one-period notice. They therefore keep getting paid during this
quarter even if they no longer participate in production. This compensation is entered in the
“Other expenses and products” in the company’s income statement.
As a consequence, when R&D investments translate into productivity gains, they generate lay
offs and the number of production people put at work is always optimized. Production costs are
reduced ; but a severance pay equals to a quarter salary is paid to laid off workers during the
advanced notice quarter.
4. RAW MATERIAL SUPPLY
For the time being, products are exclusively manufactured using raw materials purchased over
the world open market. The purchase price is different from one country to another: a national
raw material index price is affecting raw material purchase cost. As a consequence, if standard
price for one unit of raw material on the world market is 10.80 € (index 100), it will cost 11.88 € to a
firm in a country where the raw material index si 110, and so on.
The prices are directly proportional to quantities bought: discounts for bulk purchases can reach
40 % of the base price for orders exceeding 200,000 units per quarter.
It is also possible for a firm to purchase raw materials from another firm (see III. 1. Raw Material
contract).
The initial consumption of raw material is one unit of raw material for each unit of finished
product. It may vary as a function of R&D spending.
9. 5. THE SPOT MARKET
Deciding on production volumes is of prime concern. A firm must always make sure its total
production capacity (given workshop capacity and raw material available) isn’t lower than its
planned production. If not, measures will be taken to ensure the expected amount of finished
products are available on the market.
- If all the raw material available (inventory + purchase) isn’t sufficient to realize the
planned production, last minute raw material purchases (called “spot” purchases) are
automatically carried out, at a higher price given the urgency.
- If the planned production is greater than the workshops capacity, finished products will
be purchased on the spot market, there again at a higher price.
- Likewise, if not enough raw materials or finished products are available for contract sales,
spot purchases are also triggered in the same way.
10. III. CONTRACTS
Firms may look for partners, for many reasons: to sell products manufactured by a foreign firm
and in doing so change the competitive equilibrium existing in their market; to look for additional
market volumes abroad; to sub-contract production to another firm or install manufacturing
capacities abroad to minimize production costs … etc.
These strategic moves generate opportunities for cooperation between firms whether they are in
the same country or not.
These partnership agreements between firms are materialized by contracts with precise terms of
agreement. It is to be noted that a firm cannot penetrate a foreign market on its own. Going
abroad can only be done through a partnership with a foreign firm.
1. RAW MATERIAL CONTRACT
Access to raw material resources is not equal, as prices on the world market depend on country
indexes. Some companies may therefore have an interest to purchase their raw materials from
other firms that benefit from cheaper access to raw material on their market.
2. SUB-CONTRACTING CONTRACT
A company might decide to increase its own offer on its local market by buying products from
another firm and repackage them into its own packaging. This would create lower costs or an
increase in market share without heavily investing in production. To do this, both firms must sign a
sub-contract agreement.
As sub-contracted products are mixed with own produced products, a firm that has the
certification for its products cannot buy non certified products this way (because they would be
sold as being certified when they’re not). Should a firm do this, it would incurr a severe penalty
(10 € per product bought).
The opposite situation is allowed: a non certified company may sub-contract certified products,
although it has no financial incentive of doing so because it would sell certified products as if
they were not certified (therefore not beneficiating from the higher perceived quality caused by
certification).
3. DISTRIBUTION CONTRACT
A company may sell on its local market products manufactured by a foreign company under
the foreign brand. If they choose to do so, the two firms must sign a distribution contract. In doing
so, the objective of the company assuming distribution in its domestic country is to take
advantage of the foreign company’s brand image. For the other firm, the objectives pursued
might be to take advantage of an additional market to increase its volumes in order to reach
large economies of scale.
Attention: a firm cannot distribute more than two foreign products simultaneously. Indeed, if you
refer to decision sheet, you will see that you cannot sell more than 2 products of other firms
11. during one time quarter (decision: Product distribution origin 1 and product distribution origin 2).
This includes any foreign products that would happen to be unsold during previous quarters.
Do not forget to report in the decision sheet the origin of the product that you are distributing
(Product origin firm n°). Also report the sales price of these products, otherwise, these products
will not be distributed and will remain in your inventory.
Also, note that contrarily to sub-contracting contracts, distribution contracts allow a certified firm
to purchase non-certified products, as they are sold as a different product line in a different
packaging.
4. TRANSACTIONS COSTS
Any contract signed between firms of the simulation will bear transaction costs covering
transportation, insurances, and various services linked to the contract.
These transaction costs between countries are not equal among all countries, they may even
differ depending on the “direction” of the contract. They can also change throughout time.
These costs will be shown in the economic context information for each quarter.
Transactions Costs (% of contract value)
Areas CHINA EUROPE USA
Transaction from CHINA to 2 % 4 % 4 %
Transaction from EUROPE to 4 % 2 % 3 %
Transaction from USA to 4 % 3 % 2 %
5. CONTRACT ADMINISTRATIVE COSTS AND CONTRACT DEPARTMENT
Partnership contracts generate internal consumption of resources of the firm (travel expenses,
managerial costs, legal services, etc.). As a consequence, each contract bears an
administrative cost of 1,000 € per contract.
It is possible to avoid incurring these costs, by creating a dedicated specific contract
department. Such an organization has a quarterly fixed cost of 5,000 € . Attention! This service
does not prevent the firm from being charged for the required usual transaction costs.
6. CONTRACT MODIFICATIONS
Contracts may be modified or even canceled if (and only if) both firms are willing to do so.
Contracts can be directly modified in the GAÏA interface; to cancel a contract however, an
administrator must be contacted.
12. IV. FINANCE
1. INTER COMPANY CREDIT
There are varying payment conditions for sales and purchases. Credit terms received from
suppliers or given to customers depend on the country the firms belong to.
The proportion of sales received on credit (and therefore the counterpart paid cash) is a
function of the "receivables/sales" ratio which is specific to each country. For purchases, the
percentage is obtained from the “payables/purchases” ratio.
The share that is sold on credit appears in “receivables” in the balance sheet of each firm. These
receivables are paid during the following quarter. A firm may however decide to discount part
of this sum to a bank; in this case the cash will be immediately available. The prime lending rate
equals to 90% of the short-term lending rate.
These conditions hold for sales on the consumer market. Regarding interfirm sales (contracts),
firms are free to negotiate the part to be paid cash and the part paid with a one-period delay.
Commercial common practices as well as national regulations may change the average credit
terms whether for suppliers or clients.
2. DIVIDENDS
So far in the simulation the firm hasn’t distributed any dividends. It is however possible at any time
to proceed to a distribution of dividends, provided certain specific conditions are met.
3. LOANS
To cover their financial needs beyond their own self-financing possibilities, the firms can resort to
both short term loans and medium term loans.
Medium-term loan
A firm may apply for a medium term loan. The bank may deny the request or change the
amount and/or the duration of the loan. Medium-term loans are received with a one period
delay, and must be reimbursed over 8 periods, starting from the period following the reception of
the loan.
Short-term loan
A firm may also apply for a short-term loan. Short term loans are received immediately and are
fully reimbursed at the following period.
13. Overdraft
In case a firm becomes short of financial resources, banks will automatically give access to an
overdraft facility in order to prevent the company from becoming insolvent. This overdraft should
however not be considered as a “normal” financial procedure and bears a very heavy financial
cost.
Purchase and sales of notes
In case a firm has excessive funds, it may have these funds produce interest by purchasing (and
later selling) notes and keeping them for one or several quarters. The secured interest rate will be
equal to 80% of the short term loan interest.
V. APPENDIX : ECONOMIC CONTEXT – PERIOD 1
Workshops technologies specificities
Techno 1 Techno 2 Techno 3
Production capacity (units) 1,000 5,000 10,000
Price (K€) 216 1,296 3,240
Standard cost per product
Raw material 10.80 9.72 8.64
Labor 35.10 30.78 27.00
Depreciation 5.40 6.48 8.10
R&D 2.70 3.78 4.32
Total 54.00 50.76 48.06
Certification requirement
Required R&D expenses per unit 8 € 6 € 4 €
Required additional fixed R&D expenses 10,000 €
Countries specificities
Country : CHINA EUROPE USA
Market size (K units) 411 286 268
Raw material cost index 105 100 103
Labor cost index 90 107 103
Workshops (technologies) cost index 104 95 98
R&D cost index 110 95 90
Max overtime 25 % 20 % 20 %
Overtime cost 1.50 1.50 1.50
Max overtime 25 % 20 % 20 %
Overtime cost 1.50 1.50 1.50
Raw material quantity discount
Quantity 28 000 36 000 50 000 100 000 200 000
Discount
(%) 5 % 10 % 20 % 30 % 40 %
