Strategy and Business Presentation

Introduction to Strategy and Business Policy
Copyright 2006 Ernest R. Cadotte
Learning Strategy
I listen, I forget. I see, I remember. I do, I understand.
Old Chinese Proverb

Learning Strategy
Computer simulations are a form of combative
training where participants pit their entrepreneurial

business skills against those of formidable
opponents under the watchful eye of a training

coach.
When we study one discipline at a time, we are like a bunch of blind people trying to understand what an elephant is.
Its a sheet of rawhide. Please tell me what it is? Its a steel tube.
Its a snake.
Its a tree trunk.
With business simulations, you can crawl all over and under the new venture to help you to see and understand the whole thing.
Accounting Marketing Distribution It is an enterprise!
Finance
Human Resources
Production
Team of Experts Helped to Design a Very Realistic Learning Environment

Harry Bruce leadership, governance Joyce Russell team work, human resources Jim Reeve accounting, profit analysis Sarah Gardial & Bob Woodruff customer value Jim Wansley finance Dominique Garval business strategy Ernie Cadotte marketing Ken Gilbert production processes Ivan Slimak brand design, quality processes Tom Mentzer supply chain
Learning Strategy:
Learn by Doing Participants learn about all aspects of strategic planning by managing a simulated new business venture.
The Marketplace scenario follows the lifecycle of a new product.
Business decisions are introduced as they become relevant in the evolution of the product and Copyright 2006 Ernest R. Cadotte company.
Mental Discipline & Business Culture

Live and breathe strategic planning and management in a rapidly changing environment. Develop leadership, teamwork and interpersonal skills. Promote better decision making by learning to manage a totally integrated company, including the management of sales outlets, marketing, production, and human and financial resources.

Crystallize the financial implications of business decisions and how they flow to bottom-line performance.
Facilitate learning of important business concepts, principles and ways of thinking.

Discover how important it is to use market data and competitive signals to adjust the strategic plan and more tightly focus business tactics. Build business confidence through knowledge and experience.
How is the business simulation conducted?

Teams are placed in a entrepreneurial scenario starting up and running a new business venture. The opposition is played out by competing teams.
Objective is to profitably capture a dominant market position

Opponent Opponent
Business Team
Market
Opponent
Business Teams
Each team member assumes a tactical area of responsibility.
Marketing Finance Distribution Production Overall Leadership

How conducted?
Business team receives information on current situation. Current situation is evaluated, strategy formulated and tactics set in placed. Tactical decisions are fed into the Marketplace simulator, along with decisions of opponents.
Results of decisions are fed back to business team.

How conducted?
The business team can acquire information on what is happening in the marketplace: customer reaction to market decisions competitor actions Current situation is evaluated, strategy formulated, and tactics set in place.
Tactical decisions are again fed into the Marketplace simulator.

Game Scenario
You and your business partners have decided to enter the international microcomputer industry. The microcomputer industry is in its introductory stage of the product life cycle.
Several other international new venture firms

are entering the market at the same time.
You can setup an international Web Center for e-commerce, and/or four international sales offices.
What are the pros and cons of each sales channel?
Market Segments
(Market Structure)
Mercedes Traveler
Performance
Work Horse
Price
Chronology of Events
Q1: Organize the team, name the company, analyze market information, establish strategic
direction and set up shop (design brands, open

a sales office and/or an international web
center and build a factory).
Q2: Test-market brands, prices, ad copy, media campaigns, sales staffing and internet tactics. Determine compensation package for employees and production schedule for each brand. Q3: Study end user feedback, competitive tactics, employee productivity, factory operations, and financial performance and make adjustments to strategy and tactics.
Q4: Perform a comprehensive strategic analysis and prepare a business plan. Present strategic analysis, business plan and financial request to venture capitalists. Q4 Q6: Initiate international roll-out
campaign.
Q7: Prepare report to the Board regarding
performance since presentation of Business Plan deviations from plan justification for departures strategic analysis of current situation plan for future
Equity Financing (Q1-Q3)

The initial capitalization is 4,000,000 which is being
invested by the executive team over the first 3 quarters, 2,000,000 in Q1 and 1,000,000 Q2 and Q3. The executive team owns 100% of the company. Forty thousand shares of stock will be issued to the
executive team in exchange for their 4,000,000.

The initial stock value is 100 per share.
Equity Financing (Q4)

At the start of quarter 4, the executive team will have the opportunity to request up to 4,000,000 from venture capitalists. The venture capitalists will expect a strategic plan for the next three quarters in business, including
strategic analysis of the current situation, strategy (goals, priorities, and strategic thrusts),
tactical plan (geographic expansion, R&D, plant expansion, etc.) and

pro forma financial statements through Quarter 6
Debt Financing (Q4 and beyond)

The bank will extend a line of credit to the executive team equal to one and a half times the firm's equity position in the previous quarter. The bank is highly risk adverse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.
Special Financing Needs

The bank is intolerant of poor financial management. If a firm ends a quarter with a negative cash position, the bank will contact a loan shark by the name of Guido to obtain an emergency loan to cover the firm's checking account.
Guidos Financing Terms

Guido requires repayment in the next quarter The emergency loan interest rate is a sliding scale which begins at 10% per quarter and may go as high as 25% per quarter. For each 100 which Guido places in your checking account, he will take one share of stock in your firm. The issuing of stock to Guido causes a dilution of your stock value and your share of the company.
Bankruptcy
A firm is technically bankrupt if its cumulative losses exceed its equity investment. Bankruptcy occurs when the sum of the retained earnings and the common and preferred stock is a negative number. Stated differently, the management has used up all of the equity of the firm when the negative value of the retained earnings exceeds the value of the common stock.
Performance Evaluation
Balanced Scorecard- cumulative score for quarters 3 through 6 Business Plan Report to Board Strategic thinking and tactical execution Executive Briefings How well the company is prepared for the future
Measurement of the Firms Performance

The Balanced Scorecard
Why Use a Balanced Scorecard?

It is too easy to get caught up in market share and short-term profits. Long-term viability requires that managers also deliver customer satisfaction and invest in the future. The balanced scorecard measures both the long-term and the short-term. The best managers will be good in all areas measured.
Financial performance Human resource management Market performance
Asset management
Total Business Performance
Marketing effectiveness
Creation of wealth
Investments in the firms future
End of Introduction to Strategy and Business Policy
The following slides provide an introduction to the Web Software for Strategy and Business Policy in the Marketplace
Marketplace is a Fun Way to Learn About Strategy

It is a business game. It is learning by doing. It brings to life business concepts, principles, and ways of thinking. It energizes the competitive spirit. It is transformational it all comes together, discover you can be a manager
It Is Realistic!
You do what real-life strategists do: Evaluate market opportunities Write a business plan Raise money by selling your plan to investors Do what you said would work execute the plan Be judged not by your promises but by your results
You Will Actually Run the Business

Design brands Distribute products to end users Workup advertising campaigns Decide on employee compensation Schedule production Worry about profits Manage cash flows Etc.
It Is Organized!
The game scenario follows the logical process of starting up a new company. You are guided through the strategic planning and decision-making processes. Detailed help files are available at the touch of a button.
You Will Sweat the Details

Investors are challenging Customers are demanding Competitors are unrelenting Many functional, tactical decisions to master Decisions must be well coordinated and timed Cash is always a constraint Constant skillful adjustment is required to stay on course and get ahead
You will be Driven!

Inherent competitiveness it is in your genes
Ownership it is your business, your money, your responsibility Captivating try ideas and see results immediately
Development of Your Critical Business Skills

Discussion and debate within each team Managing many tactical decisions within financial constraints, demanding customers and aggressive competitors Preparation of business plan Negotiations with Venture Capitalists Instructor interaction with teams
Regular Executive Briefings
Sequence of Key Activities

Startup phase (3 quarters)
Organize the team and learn to work together Learn the business Test the market
Transition phase (one quarter)

Prepare Business Plan to accelerate growth Present Business Plan to and negotiate equity investment with independent Venture Capitalists
Growth phase (3 quarters)

Execute Business Plan Skillfully adjust tactics in response to unforeseen problems and opportunities
Final accountability - present Report to Board

Introduction to Software
Marketplace is available via Netscape and Internet Explorer.

Go to: marketplace6.com
The step-by-step process that walks you through the information and decisions. The software controls your progression to reduce your uncertainty and to help you see the logic of the marketing process.
Be sure to read the directions on how to use the Marketplace software.
For illustration purposes, suppose you start up a company named Traveler Computers.
You can setup an international Web Center for e-commerce, and/or four international sales offices.
What are the pros and cons of each sales channel?
Market Segments
(Market Structure)
Mercedes Traveler
Performance
Work Horse
Price
Each market segment has its own set of needs.
You must decide which segment you want to target initially. As the exercise progresses, you are asked to select a second segment.
For example, the Traveler segment might be selected.
Once you select a segment, you must design a brand to meet the needs of the segment.
What features would make a computer more attractive to the Traveler segment?
You set the selling price, decide if you want to use a rebate, and signal to the sales staff which brand has the highest priority.
You must design ads which appeal to the target segment.
You decide which brand will be featured in the ad.
You select the benefits to mention in the ad and indicate their order of priority.
You can select marketing tactics that can increase the traffic to your site.
You can spend more or less than the industry norm to potentially change the relative attraction of your web site. What commission should you offer your partners?
Once at your web site, what can you do to increase the probability visitors will make a purchase?
The tactics are not equally good and some may not justify any expenditure.
You must decide on the compensation package for your employees.
And, how many sales people to employ.
You can specify how many should be assigned to each segment and service support.
How many units should you produce to meet demand?
And, how much should you invest in plant capacity for next quarter given your demand forecast and financial liquidity.
When your decisions are ready to be processed through the Marketplace simulator, a quality check is made to make sure there were no entry errors and nothing important was forgotten.
Immediately after processing, you find out how profitable the firm was in the quarter that just ended.
You can see your market share by segment and for the whole market.
Your company is Traveler.

You are given market research that tells you how satisfied your target segment is with your brand design and those of the competition. 100 is total satisfaction.
You are also given a profit analysis of each brand so that you can adjust your brand strategy.
If a brand is not doing well, you can study other brands and redesign your brand.
Your Better brand brand

Grading:The Balanced Scorecard

Final evaluation will be computed based upon:
Financial Performance (earnings per share) Market Performance (market shares in 2 target segments adjusted for unmet demand) Marketing Effectiveness (customer satisfaction with brand and advertising designs in 2 target segments (scored 0 to 100) plus unit sales per sales person) Investments in the Future (spending on new offices and research and development as percent of sales) Creation of Wealth (retained earnings/total investment) Asset Management (asset turnover adjusted for excess inventory) Human Resource Management (sales force and factory worker productivity) The Final Score is a single number which combines all of these factors. The results of Quarters 3 through 6 will be used to compute the grade.
Each quarter, you will be presented with your balanced scorecard. Your goal is to be the best firm by Quarter 6 in Total Business Performance.
You can also compare your scores against industry standards.

Mechanics of Web Marketplace
Electronic Marketplace Resides at Innovative Learning Solutions

Students log on to view information and make decisions
Marketplace Processing Center

Q1, Organize the Business

Name the company Assign organizational responsibilities Share personal learning goals Establish team norms
Q1, Establish Strategic Direction

Analyze market information to evaluate the market opportunity Consider
Available financial resources
Costs to open sales outlets

Costs to set up and operate factory
Establish strategic direction

Formulate corporate strategy Formulate functional strategies
Q1, Setup Shop Tactical Decisions

Locate factory in Toronto all firms
Build fixed plant capacity

Develop channel options
Decide on relative emphasis of brick and mortar offices versus web centers
Open initial sales office or web center
Design two brands for target market segments

View Sample Decisions
The Following Slides Represent a Marketing Lecture on Market Response Functions

Students must design brands in Quarter 1. In selecting components and price points, they should be aware of the markets many response functions. Copyright 2006 Ernest R. Cadotte
Customers Buy Benefits, Not Features
Once you select a segment, you must design a brand to meet the needs of the segment.
Using the computer on the road is important to the traveler segment. What features would provide this benefit? Using the computer on the road
Slim, rugged, portable design
10 color flat screen for portable
Network and Internet connections
How far do you go in giving the customers what they say they want?
Is more speed, software applications, memory, keys on the keyboard, etc. always valued? Could more of some feature even make a customer unhappy?
What is the elasticity of the peanut?

Searching for the Markets Response Function
Suppose you could design the ideal candy bar. How many peanuts would you put in the candy bar to make you the happiest?
None A few? A bunch? A whole lot?
Which Candy Bar has the Most Peanuts?

Baby Ruth Snickers Payday Milky Way
Which Candy Bar Do You Like the Most?

Baby Ruth Snickers Payday Milky Way
What does your response function look like for peanuts?

Is more always better?
Would your happiness increase with every new peanut we added to the candy bar? Is there a limit?
Influence of peanuts on candy bar enjoyment

Um-um good
Yuk
None
few
bunch
whole lot
Number of Peanuts
What would be your response function for the following?

Chocolate Caramel Nougat Coconut Rice Peanut butter
Here are a number of response functions. Which one applies to peanuts, chocolate, coconut, etc?
Hot More is always better Hot
Cold
Cold
More is good to a point and then ceases to add excitement
Less
More
Less
More
Response Functions
More adds value to a point & then takes away value A little is just right, more only takes away value Hot
Hot
Cold More
Cold
Less
Less
More
Response Functions
Hot Hot Little interest until threshold is crossed
Any amount is bad
Cold
Cold Less More Less More
Response Functions
Hot
No reaction/indifference to having the feature
Cold
Less
More
Take Any PC Segment, How Excited Will It Become if You Provide?

More memory More functions on the key board More software More .
Just like the candy bar ingredients, you must discover the response function for each PC component.
Select components that yield benefits for Travel PC segment

Portability Use on road Connect to office Easy to use
Rugged casement
Microcircuitry
High resolution flat LCD display
Wireless modem
6-hour battery
Low-profile, built-in disk, CD drives
Compact keyboard
Trackball Wrist rest mouse on keyboard
Learning Points for Quarter 1

Managing the team Organizing the work Deciding what one wants from the learning experience

Market opportunity analysis Strategic and tactical planning Segmentation and target marketing Financial management

Game theory - competitive positioning Brand design
linking product features to customer benefits finding the customers response functions
Financial liquidity - cash versus assets
Strategic Planning Mental Discipline

Objectives Strategy Tactics
Problem
Strategic Analysis
Internal appraisal External appraisal
Strategy Formulation
Tactics
Definition of problem
Resources made Tactical Plans available Execution Strategic options Choice of one option
(Chosen Option = Strategic Thrusts)
Controls
Note : The chosen option is made of Strategic Thrusts

Copyright 2006 Ernest R. Cadotte Copyright Dominique Garval 2003
The following slides are for Quarter 2
Q2, Go to Test Market

The Goal is to Maximize Learning and Not Profits.

50% of the firms decisions will prove to be unacceptable be careful

Set selling prices
Develop advertising campaign
design 2 ads, one for each brand determine number of placements per ad
Develop sales channel

hire sales force for quarter open new sales outlets for Q3
Q2, Test Market

Schedule production
forecast demand set daily production for each brand run factory simulation, check numbers
Contract for market research on customers and competition Check pro forma financial statements
You are a market maker, not a market taker

The market is not waiting for you to take their orders. You must create the market
Sell brands that customers want and at a price they are willing to pay Locate sales offices where the largest number of customers can be found Inform and persuade customers to buy a PC through advertising Hire sales people to go out and find customers and persuade them to buy your PC
How to Set Price?
Costs (production, marketing, overhead) Profit goals What market will bear Competition
In the beginning, you will not be able to price above your costs
There are many startup costs which will exceed your revenues. Your production volumes will be very low, resulting in high per unit costs
No Early Profits
Costs to setup + & grow the business
Money 0 Time
Revenues will fall below costs at outset of new business

Revenue
+ Costs to setup & grow the business
Money
0 Time
Profits will come later

Revenue + Costs to setup & grow the business Profits 0 Time You are here Copyright 2006 Ernest R. Cadotte
Profit
Profits come later
Your goal is to speed up the adoption rate

maturity
decline
Demand
growth
introduction
You are here, high costs-low demand
Time
What will the market bear?

You must discover the market response function regarding price.
What is the markets price response function?

Your Demand
Inelastic (price is not a big factor)
Elastic (demand drops fast with increasing prices)

Your Price
Or, maybe it looks like this?

Your Demand
Demand drops slowly with small price increases and then drops dramatically with larger price increases
Your Price
A differential advantage can reduce price elasticity

Your Demand
Less Elastic
Elastic
Price premium for your brand
Differential advantage shifts demand curve and reduces price elasticity
How will the market respond to competitor prices?

Your Demand
Low competitor prices will kill your demand

Competitors Price
How to create ads?
Your Ad
Low price
Easy to use
More productive
Fast
Office applications
Picture office workers
Most important
Least important
Order of priority implies importance of message to customer
Order of priority tells the ad agency what to stress in the ad

How much to say in an ad?

(number of benefits)
Which response function is at work? or

Hot Hot
Cold
More is good to a point and then ceases to add excitement
Cold
More adds value to a point & then takes away value

Less More
Less
More
How often do you advertise?

Your Demand
Diminishing returns
Too little
Number of ads
But it also depends on what your competitors do
Your Demand
Strong competitor advertising will steal away your customers

Competitors Advertising
How many sales people?

Diminishing returns
Your Demand
Too many
Too few
Number of sales people
The response function is dynamic!
Your Demand
Shift the response function upwards with better brands, prices, advertising, sales force placement
Number of sales people
Managing Inventories and Cash (the razors edge)

High production
Lower unit production costs Risk of too much inventory
Uses up large volumes of cash Risk of brand obsolesce (wrong product in warehouse)
Low production
Low cash requirements Higher per unit production costs Risk of too little inventory
Stock outs Lost revenue Customer ill will (unhappy customers)
Projecting Demand
Sales people will probably sell between 30 and 100 units each. Demand is a function of market potential of the segment and market and the quality of marketing decisions. On average, sales people will sell 50 units each for the entire quarter.
Expect net losses and negative cash flow

Revenue + Costs to setup & grow the business Profits 0 Time You are here Copyright 2006 Ernest R. Cadotte
Profit
Profits come later

Execution of a coherent strategy Management of cash in the face of great uncertainty Learning to walk before you run

Coordinating a host of tactics Pricing - balancing costs, profit, what the market will bear, and competition Testing the market - discovering the markets many response functions Production - managing capacity, inventories, and costs in light of demand goals

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Introduction to Strategy and Business Policy

Copyright 2006 Ernest R. Cadotte

Old Chinese Proverb

training where participants pit their entrepreneurial

opponents under the watchful eye of a training

Its a tree trunk.

Copyright 2006 Ernest R. Cadotte

Team of Experts Helped to Design a Very Realistic Learning Environment

Copyright 2006 Ernest R. Cadotte

Mental Discipline & Business Culture

Mental Discipline & Business Culture

Facilitate learning of important business concepts, principles and ways of thinking.

Copyright 2006 Ernest R. Cadotte

Mental Discipline & Business Culture

Copyright 2006 Ernest R. Cadotte

How is the business simulation conducted?

Copyright 2006 Ernest R. Cadotte

Objective is to profitably capture a dominant market position

Copyright 2006 Ernest R. Cadotte

Marketing Finance Distribution Production Overall Leadership

Results of decisions are fed back to business team.

Tactical decisions are again fed into the Marketplace simulator.

Several other international new venture firms

What are the pros and cons of each sales channel?

Copyright 2006 Ernest R. Cadotte

direction and set up shop (design brands, open

center and build a factory).

Copyright 2006 Ernest R. Cadotte

Copyright 2006 Ernest R. Cadotte

Equity Financing (Q1-Q3)

executive team in exchange for their 4,000,000.

Equity Financing (Q4)

tactical plan (geographic expansion, R&D, plant expansion, etc.) and

Debt Financing (Q4 and beyond)

Copyright 2006 Ernest R. Cadotte

Special Financing Needs

Guidos Financing Terms

Copyright 2006 Ernest R. Cadotte

Measurement of the Firms Performance

Copyright 2006 Ernest R. Cadotte

Why Use a Balanced Scorecard?

Financial performance Human resource management Market performance

Total Business Performance

Investments in the firms future

End of Introduction to Strategy and Business Policy

Copyright 2006 Ernest R. Cadotte

Copyright 2006 Ernest R. Cadotte

Marketplace is a Fun Way to Learn About Strategy

You Will Actually Run the Business

Copyright 2006 Ernest R. Cadotte

You Will Sweat the Details

You will be Driven!

Copyright 2006 Ernest R. Cadotte

Development of Your Critical Business Skills

Sequence of Key Activities

Transition phase (one quarter)

Growth phase (3 quarters)

Final accountability - present Report to Board

Copyright 2006 Ernest R. Cadotte

Marketplace is available via Netscape and Internet Explorer.

Copyright 2006 Ernest R. Cadotte

Be sure to read the directions on how to use the Marketplace software.

Copyright 2006 Ernest R. Cadotte

What are the pros and cons of each sales channel?