Biz Sim 8 Quarter Report


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My written report about my fictional manufacturing company's performance in a business simulation computer program for my Management Topics class at SUNY Brockport. Written 5/1/2005

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Biz Sim 8 Quarter Report

  1. 1. Sonic Blaze Eight Quarter Report Adam R. Schott BUS 369.01 Spring 2005
  2. 2. Sonic Blaze Eight Quarter Report 2 OVERVIEW The Sonic Blaze portable mp3 player is positioned to be a quality product that is affordable to middle-class consumers. It has the most common features of in-demand mp3 players without all the bells and whistles of high priced players. Sonic Blaze is of substantially higher quality than other models offered by our competitors in our price bracket but not as high quality as the higher-priced mp3 players. With this in mind, I adopted a medium-range price strategy. The original Strategic Plan and Master Budget for the Sonic Blaze was to heavily invest in Product Development, Quality Management and Advertising & Promotion in the first quarter to establish the Sonic Blaze brand. Product Development and Quality Management spending would then be decreased each quarter. Advertising & Promotional spending would remain high throughout the year to generate demand and maintain the brand image. PRICING STRATEGY The initial wholesale price for the Sonic Blaze was set at thirty-five dollars per unit. This is at the high end of the medium-price range. I felt that this was the proper price because of the Difference Between Actual Sales and Forecasted Sales quality of the $2,500 Sonic Blaze. $2,000 $1,980 $1,925 Unfortunately, I $1,750 $1,766 $1,716 $1,815 $1,806 $1,575 $1,616 $1,698 $1,749 $1,701 $1,624 $1,597 $1,584 was mistaken: $1,500 $1,540 Sales (000) Sales were good $1,000 but not as high $500 as expected. $0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Actual Sales Forecasted Sales
  3. 3. Sonic Blaze Eight Quarter Report 3 From quarters one through three sales were consistently lower than expected. Sales in quarters six through eight were right on target. I was able to do this by carefully analyzing the effect of the economic index on sales. The mistake I made in the previous quarters was overestimating the increase in demand that would coincide with an increase in the economic index. With more data on past sales to analyze it was much easier to predict future sales. MP3 Industry Wholesale Prices The key Q1 - Q4 Prices remained $45 $41 $41 constant after Q4 reason Sonic Blaze $40 $39 -$39 - $40 -$40 - quarter four ------$39 ------ ----$35 ---- -------$35 ------ --- $35 ---- ---- $34 ---- $35 $33 underperformed in $30 $29 the market in the $25 Price $20 first four quarters $15 $10 was because the $5 wrong price was set $0 Sonic Blaze Competitor 1 Competitor 2 Competitor 3 Competitor 4 Competitor 5 Competitor 6 Company for the Sonic Blaze Q1 Q2 Q3 Q4 brand given the Comparison of Sonic Blaze Product Development Budget to Industry Average Product strategy Development Budget $160 $150 employed. $137 $140 $125 $125 There was $120 $110 $111 $109 $111 $103 simply too much $102 Budgeted Amount (000) $100 $90 $90 $90 $90 competition at $80 $75 $75 the $35 level for $60 Sonic Blaze to $40 compete at that $20 price level with $0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Product Development Average Product Development Budget
  4. 4. Sonic Blaze Eight Quarter Report 4 my strategy. Of the six portable mp3 player manufacturers in the industry, four companies positioned themselves in the mid-price range. Two other companies in the industry also set their product’s price at thirty-five dollars a unit but spent more on product development and quality management than Sonic Blaze. In order to compete in the market, I either needed to invest more money in product development or reduce the price of the Sonic Blaze. At the end of quarter three, I decided to reduce the wholesale price of the Sonic Blaze from $35 per unit to $33 per unit. The price change boosted demand more than expected. With 3,690 surplus units in inventory at the beginning of Impact of Price Change on Sales $41 60,000 the fourth 54,718 53,509 $39 48,960 51,457 51,557 50,000 quarter and a 46,410 45,630 44,000 $37 40,000 manufacturing Sales (Units) $35 $35 $35 capability of Price $35 30,000 $33 $33 $33 $33 $33 $33 20,000 50,480 units, the $31 10,000 manufacturing 3,971 0 0 0 plant was unable $29 $0 $62 $0 $0 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter to produce Price Sales Lost Sales enough units to keep up with demand. In the fourth quarter the Sonic Blaze brand incurred lost sales of 3,971 units. Normally lost sales are viewed as a negative event. In this case, however, they should be viewed as positive. The fact the Sonic Blaze incurred lost sales means that I have effectively increased the demand for my product. Sales steadily increased for two quarters after the price change. In quarter six I again incurred lost sales, but only for sixty-two units. This was due to an unexpected jump
  5. 5. Sonic Blaze Eight Quarter Report 5 in my product perception generated by increased advertising. This will be discussed more in-depth later in this report. QUALITY MANAGEMENT STRATEGY My quality management strategy was to keep the quality management budget at a fairly consistent level. I wanted to make the Sonic Blaze the highest quality mp3 player on the market in the mid-range price bracket. My Sonic Blaze Quality Management vs Industry Average Quality $160 $141 $140 $137 $130$132 $129 $130 $125 $127 $123 $120 $120 $120 $120 $120 $120 $120 Quality Management Budget (000) $110 $100 $80 $60 $40 $20 $0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Quality Management Average Quality Budget Management budget was only slightly lower than the industry average each quarter. Even though my budget was slightly below the industry average I believe that I spent more in quality management than my competitors in the same price bracket and that the industry average was inflated by the high-priced competitors’ spending. PRODUCT DEVELOPMENT STRATEGY
  6. 6. Sonic Blaze Eight Quarter Report 6 My product development strategy was to heavily invest in product development in the first quarter, reduce spending in the second quarter, and then taper off spending to $75,000 in the remaining quarters. The thinking behind this was to develop a product with all the Impact of Product Developement on Market Share necessary $160 16.00% $150 15.40% 15.40% and most 14.10% 15.10% 15.00% $140 $137 13.30% 14.10% 14.00% demanded 13.70% $125 $125 $120 12.00% Product Developement Budget (000) $110 $111 $109 $111 features at $102 $103 $100 10.00% $90 $90 $90 $90 the outset Market Share $80 $75 $75 8.00% but to keep $60 6.00% enough $40 4.00% money in $20 2.00% the budget $0 0.00% Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 to make Quarter Sonic Blaze Product Development Average Product Development Budget Market Share minor Increase in market share is due to price decrease improvements if they were needed. Starting in quarter five, I deviated from my original Product Development strategy and increased the Product Development budget to ninety-thousand dollars a quarter. I was spending much less than the industry and feared that consumers would view my product as inferior and I would lose market share if I did not increase the development budget. I believed that in the mid-range price bracket quality would be more of a price driver than the latest technology: If people wanted all the latest technological features on their mp3 player then they would opt for a higher-priced mp3 player; I was wrong. Quality
  7. 7. Sonic Blaze Eight Quarter Report 7 did play a small role in driving demand; however, product development was more important to consumers. Putting more money into product development would mean that I would have to take out more bank loans. A large part of the decision to cut back on product development so much in the first place was a desire to eliminate my need to take out any more bank loans. The way I saw it, I needed to finance my operations from equity, not through debt. Quality has always been very important to me, and my production cost-per-unit was decreasing every quarter but not as much as I would have liked it to; so cutting back on the Quality Management Budget was not an option. I tried to establish the connection between my Quality Management Budget and Product Development Budget and my Product Perception Grade but found none. When I lowered both my Quality Management and Development budgets in quarter two my Product Perception Grade increased: In quarter three when I increased both budgets my
  8. 8. Sonic Blaze Eight Quarter Report 8 Product Perception Grade decreased – exactly the opposite reaction one would expect. Relationship Between Quality Management, Product Developement, and Product Perception $160 95.0 $150 94 94.0 $141 $140 $137 $137 93.0 $130 $132 $129 $130 92.0 $125 $125 $125 $127 $123 $120 $120 $120 $120 $120 $120 91.0 $120 $110 90 Quality Management and Product $110 $111 $109 $111 90.0 89 Developement Budget (000) $102 $103 89.0 Product Perception $100 88.0 87 87 $90 $90 $90 $90 87 87.0 $80 $75 $75 86.0 85.0 $60 84 84.0 83 83.0 82.0 $40 81.0 80.0 $20 79.0 78.0 $0 77.0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Quality Management Product Development Average Quality Budget Average Product Development Budget Product Perception
  9. 9. Sonic Blaze Eight Quarter Report 9 There also seemed to be no direct connection between the difference between Sonic Blaze’s budgets and the industry average, as there was with market share. At the end of quarter four I came to the conclusion that since I could not identify the direct cause of my loss of market share the best course of action would be to stick with my Master Budget and lower the Sonic Blaze wholesale price to reflect the lower perception. My strategy to increase market share appeared to pay off: as soon as I lowered the wholesale price I regained market share. However, while market share did increase for two straight quarters it only increased slightly. I was never able to maintain more than a 15.40 percent market share. In regards to product perception, I failed to identify the primary driver. I theorized that it was somehow linked to product development but I was wrong. Since I could not identify a relationship I decided to keep my Product Development and Quality Management budgets at a constant level. After looking over all the data and drawing several graphs I have come to the conclusion that there is no primary driving force behind market share. It is determined by the overall relationship between Sonic Blaze’s budgets and the industry average budgets.
  10. 10. Sonic Blaze Eight Quarter Report 10 Relationship Between Sonic Blaze Budgets, Industry Average Budget, and Product Perception $180 96 $160 94 94 92 $140 90 90 $120 89 Product Perception 88 Budget (000) $100 87 87 87 86 $80 84 84 $60 83 82 $40 80 $20 78 $0 76 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Advertising & Promotion Quality Management Product Development Average Advertising Budget Average Quality Budget Average Product Development Budget Product Perception ADVERTISING & PROMOTION STRATEGY With four of the six companies in our industry competing in the mid-range price bracket I decided to invest heavily in advertising and promotion. Each quarter Sonic Blaze’s advertising and promotion budget was higher than the industry average.
  11. 11. Sonic Blaze Eight Quarter Report 11 Sonic Blaze's Advertising and Promotion Budget vs The Industry Average $180 $160 $160 $160 $160 $160 $150 $140 $140 $137 $130 Advertising & Promotion Budget (000) $126 $120 $110 $104 $105 $100 $102 $100 $96 $96 $80 $60 $40 $20 $0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Sonic Blaze Advertising & Promotion Budget Industry Average My strategy was to create more demand for the Sonic Blaze mp3 player than the competition through advertising and building the brand image. The goal was to make consumers think “Sonic Blaze” when they think of mp3 players. FINANCIAL PERFORMANCE I am happy to report that net profit increased each quarter. Net profit tripled from quarter one to quarter four and our shareholders enjoyed an increase in stock value each quarter. Net profit and stock price skyrocketed from quarter four through eight. Stock price soared from $8.88 in quarter one to $54.10 in quarter eight - a growth rate of over six hundred percent! Net profit grew 8.33 percent in the same period of time. Because of Sonic Blaze’s rapid growth I was able to increase dividends from five thousand dollars (thirteen cents a share) to twelve thousand dollars (thirty cents a share) over the course of
  12. 12. Sonic Blaze Eight Quarter Report 12 eight quarters. Relationship Between Net Profit, Dividends, and Stock Price $140 $60.00 $125 $54.10 $120 $50.00 $100 $94 $41.35 Net Profit & Dividends (000) $40.00 $80 $74 $31.78 $30.00 $60 $57 $26.38 $45 $20.43 $42 $20.20 $20.00 $40 $24 $13.00 $10.00 $20 $15 $8.88 $10 $10 $12 $8 $8 $8 $9 $5 $0 $0.00 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Net Profit After Taxes Dividends Current Stock Price
  13. 13. Sonic Blaze Eight Quarter Report 13 The net profit margin on Sonic Blaze grew at a faster rate than the gross profit margin. The reason for this is that gross profit is determined solely by the amount of sales minus the manufacturing cost of the products sold. Reducing interest costs, product development costs, and advertising costs have no effect on gross profit: They do, however, affect net profit margin. Though I was not able to effectively boost sales, thus raising gross profit margin and market share, I was able to cut spending and interest expenses thus boosting the net profit margin. Reducing spending also increased the company’s return on assets. Profit Ratios Gross Profit Margin, Net Profit Margin, ROA, ROE 60.0% 54.3% 54.6% 54.9% 53.7% 52.77% 53.06% 53.38% 53.68% 50.0% 40.0% 30.0% 20.0% 11.4% 9.4% 10.0% 7.4% 5.7% 6.5% 4.2% 5.5% 4.2% 4.5% 3.4% 1.5% 2.4% 2.6% 2.8% 2.8% 3.3% 1.0% 1.5% 1.3% 1.4% 1.7% 2.2% 0.5% 0.7% 0.0% Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Gross Profit Margin Net Profit Margin Return on Assets Return on Equity The increase of Sonic Blaze’s stock price is directly proportional to return on assets. Investors will value the Relationship Between Return on Assets and Stock Price company more and be willing to 4.0% $60.00 3.7% 3.5% $54.10 invest more if it is managing its $50.00 3.0% 2.8% $40.00 assets better, not to mention $41.35 2.5% Return On Assets Stock Price 2.2% $31.78 2.0% $30.00 regularly increasing dividends. $26.38 1.7% 1.5% $20.43 $20.20 1.4% $20.00 1.3% 1.0% $13.00 $8.88 0.7% $10.00 0.5% 0.5% 0.0% $0.00 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Quarter Return on Assets Current Stock Price
  14. 14. Sonic Blaze Eight Quarter Report 14 As operations become more efficient and by reducing inventory plant assets are better utilized bringing about a better return on assets.