3. Overview
• Showed the quarterly nature of managing business
• Short term pressures forced us into unsustainable management
• Graded on cumulative profit and net worth (what gets measured gets done)
• Forced us to focus on these while ignoring the long term health of the business
• Difficult to focus on both metrics simultaneously
• Highlighted the importance of Cash Flow on business
• Showed how sensitive a business can be to subtle changes
4. Strategy
• Competitive Strategy
• Pursued strategy of Focused Differentiation
• Industry was competing on price
• We focused on developing quality product for premium price
• Hired ample staff: Mainly engineers focused on R&D and production to meet rising demand
• Economy was improving: Disposable income of consumers allowed business to invest
5. Strategy
• Directional Strategy
A. Growth
• Internally driven: started from scratch
• SoughtVenture capital inY1 to provide working capital & allow product development
• Drove sales through incentivised compensation schemes
• Kept price at constant level for 7 years to encourage sales and portray consistency of strategy
• Launched IPO early inY3 as sales rocketed, to ride the crest of the wave and grow confidence in
the company
6. Strategy
• Directional Strategy
B. Stability
• Implemented mid-project as a means of developing profitability
• Cut costs where allowable: Employee growth & Compensation
• Increased revenue where possible: Incremental price increases
• Negatively impacted upon net worth but we built in tolerance
7. Functional Strategy
1. Pricing Strategy
• Product Leader
• Relatively high price compared to competitors but consistent
• Allowed for product research & development
• Difficult to generate initial sales – real fear of early bankruptcy
• Expected low volume of early sales, but soon picked up
• Raised price once established with strong level of sales
• Inflated price improved profitability in latter half of the project
8. Functional Strategy
2. Employee Structure
• Chose to consistently grow employee numbers each quarter: In line with competitive and growth strategies
• Began with high proportion of Engineers
• To develop the R&D the product
• To manufacture the product for sale
• To develop the manufacturing efficiency and therefore lower the cost of production
• Slowly increased the proportion of Sales personnel
• To push the sales of the product
• To improve customer service and therefore generate repeat sales
9. Functional Strategy
3. Employee Compensation
• Part 1
• Began with salary 2/3 of Industry average: Initial Cash flow concerns
• Supplemented salary with profit sharing: encourage productivity
• Part 2
• Slowly raised salary to attract and retain quality employees
• Slowly reduced profit sharing percentage in line with salary rise
• Due to stability strategy mid-project of increasing cumulative profit
10. Functional Strategy
4. Finance
• Seed Capital
• Utilised in the first few years to establish the business and develop the product
• Lack of early sales meant dwindling of reserves
• Venture Capital
• Sought 100k venture capital inY1
• finance working capital
• tide business over until it became profitable
• Didn’t seek much funds: wanted to retain as much ownership of business as possible
11. Functional Strategy
4. Finance
• Initial Public Offering
• Launched early: the quarter after the business turned profitable
• Waited for growth to ensure stock price would increase the worth of the business
• Didn’t give away much (10%): ensure control and positive impact on net worth
• Good qualitative reason for early IPO: garner public support for the company
13. Overview
• Very little control over the Balance Sheet
• Project is short: physical companies need time to develop
• Almost all data available is quantitative
• No knowledge of the costs, financial or otherwise, of IPO orVC
• No details of the real world or macro-economy beyond brief news statement
• No knowledge of the industry
• No idea of the marketing strategy
14. Functional Analysis
1. Pricing Strategy
• Arbitrary pricing decision: Difficult to know optimum gross profit
• No marketing data available to indicate optimum price
• Unrealistic ability to change price on a quarterly basis
• Good-will & qualitative costs not impacted by sporadic price changes
• No input on procurement costs or value for money
• No feedback fromVC or stock market as to pricing strategy
15. Functional Analysis
2. Employee Structure
• No sense of corporate culture: departmental rivalry
• No sense of a management structure
• Arbitrary hiring method: assessment of the need for staff
• No sense of the requirement for ancillary staff
16. Functional Analysis
3. Employee Compensation
• Assumed that compensation is directly related to employee acquisition & retention
• Realistically motivation is less tangible in start-ups
• Compensation is the only means to eliminate job dis-satisfaction in simulation
• An option of profit sharing before the business turns profit is unrealistic
• Micro management: founder would likely be more focused on more front line issues
• No option to differentiate pay levels: Engineers & Sales people paid the same
17. Functional Analysis
4. Finance
• Seed Capital
• No stated cost of capital or IRR
• No access to debt financing
• Generally cheaper than equity & easier to access
• No sense of budgets or overheads
• No real control over costs other than salaries
18. Functional Analysis
4. Finance
• Venture Capital
• Not solely about generating capital: As much about advice and direction
• We have no knowledge or skill in the industry as a founder
• This would be essential from a venture capitalist’s point of view
• Sought and acquiredVC in the space of three months
• Realistically would take more time and work
19. Functional Analysis
4. Finance
• Initial Public Offering
• Costs involved not reflected in the simulation
• No sense of industry stock market performance
• Trends not reflected eg. Industry scandals
• Didn’t reflect the inflated perception of the company by the consumer
• No option to buy back share or to revert back to private company
20. Conclusion
• Useful simulation as a learning tool
• Good for demonstrating quantitative factors in a controlled setting
However…
• Does not reflect qualitative aspects of business adequately
• Forces micro-management
