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Question of the Week: Why do our Awareness and PR Indexes fall even when we spend more? | MikesBikes Business Simulation

Consumers can only recall a certain amount of Branding, Advertising and Public Relations (PR) messages they see. So a given amount of advertising spend, for example, becomes less effective as the total amount of advertising viewed by consumers increases.

Imagine you are the only competitor in the market and you spend $5 million on Advertising or PR. You will probably get excellent coverage, a high proportion of consumers will remember your production, and you will have high advertising or PR indexes.

Now, imagine you are one of the five competitors in the market, each of whom is spending $5 million on Advertising. Although you might reach the same number of consumers as before, they are now being bombarded with five times the amount of advertising. This is confusing, so fewer consumers will remember your products and your indexes may fall (i.e. your advertising spend is now less effective due to the large amount of “noise” that consumers have to put up with.)

The same effect applies if your competitors start spending more. Say there are five products in a segment and you are spending $4 million, and your competitors are spending $1 million each. You will probably have relatively high indexes as you are providing $4 million out of the total $8 million advertising spend.

Now imagine you keep your spend at $4 million, but your competitors increase their spend to $5 million each. You are now providing only $4 million out of a total $24 million spend and consumers are receiving three times as much advertising in total as they were previously. So again, a lower proportion of consumers will remember your products and your indexes may fall from their earlier levels.

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How to Develop Strategy in MikesBikes

Winning the MikesBikes Business Simulation requires your management team to develop a long-term strategy. As in real life, if you bounce around with your decisions you will incur extra costs without additional benefits. In the section on the Strategic Management Process, we outline the process of developing and implementing strategy.

In the 1980’s, Michael Porter (of the Harvard Business School) did considerable work in defining three types of strategies that “fit” a business unit into its environment. These are called differentiated, cost and focus strategies. These are especially pertinent in the MikesBikes-Advanced scenario. For further information see Michael Porter’s Ideas on Strategy.

Developing and Implementing Strategy

The Strategic Management Process

Making consistent decisions for a firm in all aspects of its operations is difficult without a well defined and clearly integrated strategy. The diagram below summaries a cycle which is sometimes helpful in developing this.

Strategic Management Diagram

Analysis

The first stage in developing a strategy is analysis. A management team should consider both its internal and external environment.

External Analysis: A firm should look at the opportunities and threats in its external environment. This should include a sound analysis of customer needs such as physical attributes, quality, delivery and costs and also the actions of its competitors.

Internal Analysis: A management team should also consider a firm’s own competencies and resources. This may include looking at where the firm is currently positioned, its strengths in terms of quality and delivery and its financial resources.

Synthesis

This relates to pulling together all the data from the analysis phase and determining a strategy. It can be broken up into distinct functional areas, but in reality there is considerable overlap among them and much iteration occurs.

Creating Marketing Strategy: Having completed external and internal analysis, a management team should be able to develop a marketing strategy. An important step in this involves the decision whether to compete in one narrow segment or broadly in several segments. Then the selection of a specific segment or segments allows customer needs to be defined. Once these are defined a firm can begin to implement marketing decisions in areas such as distribution channel selection, price, advertising and production volumes.

Creating Manufacturing Strategy: A manufacturing strategy should be defined in conjunction with marketing strategy. Strategic decisions may include whether to produce a low cost product, or to try and differentiate it with features and to charge a premium for this.

It also includes making decisions to provide sufficient capacity to produce at the required volumes. It also requires producing goods with the appropriate quality level, delivery speed and cost to meet the needs of target segments.

Creating Financing Strategy: After both the marketing and manufacturing strategies have been defined, the financing strategy can be developed to provide the necessary finance to support investments required by the marketing and manufacturing strategies. The debt/ equity ratio can also be adjusted to balance the risk in the rest of the firm’s operations.

Iterating Strategies

While the process outlined above follows clear sequential steps it is obvious that in reality these are interrelated. Thus it is important reconsider each of the strategies to ensure that the marketing strategy does not make demands beyond the capabilities of manufacturing and that neither the manufacturing or marketing strategies require investments beyond the firm’s ability to finance them.

Implementation

Planning is necessary, but some would say that 10% of the effort is in the planning and 90% is in the implementation. In MikesBikes-Advanced, it is assumed that the outcome of your firm’s decisions depends on the amount of money you commit and on the decisions of the competitor. In reality many more things come into play, such as the quality of the feedback and control systems, the nature of leadership, and the motivation of the people in the organization.

Feedback and Control

In MikesBikes-Advanced, you have feedback at the end of each year of operation. This is the information that allows you to learn and to improve performance in the next year.

Leadership

Leadership can make a huge difference to the performance of an organization. What sort of leadership, by whom, and when, is much more difficult to specify. This is not modeled in MikesBikes-Advanced.

Motivation

Motivation comes from rewards. These rewards can be financial (such as salary, bonuses, cars, etc), or non-financial (such as the satisfaction that comes from the work and being part of a team, the development of a person’s personal skills, etc). A good environment balances these two types for each individual to get the most rewarding environment.

Michael Porter’s Ideas on Strategy

In the 1980’s Michael Porter developed some models for strategic analysis that focused on the five forces presented below. The best industry to be in is one which is most favorable in these areas.

Porter's Five Forces

Out of this analysis, he suggests that it makes sense for a Strategic Business Unit to choose one of three “generic” strategies – cost, differentiated, or focus.

The Cost Strategy suggest that one develop the least cost product for a segment. Often this is associated with selling high volumes at lowest price.

The Differentiated Strategy suggests that one develop a unique product and charge a higher margin for it.

The Focus Strategy suggest that one focus on the special needs of a niche segment.

MikesBikes-Advanced is ideally suited to experimenting with these different strategies.

Balanced Scorecard

The term “Balanced Scorecard” was coined by Kaplan and Norton to refer to a framework of financial and non-financial measures which attempts to give a more full and balanced picture of the performance of a firm.

The Balanced Scorecard is composed of four sections:

1. Financial Perspective – e.g. profit, share price.

2. Customer Perspective – e.g. sales, market share, warranty rate

3. Internal Performance Perspective – e.g. efficiency, leadtime

4. Innovation and Learning Perspective – e.g. new products

The idea is that a firm’s progress in implementing a strategy can be represented by improvements on a variety of key measures. These measures must be carefully chosen to be in line with the firm’s strategy and its plan for implementing the strategy.

The Balanced Scorecard approach can be applied in a tiered fashion to construct a performance measurement system for all levels of a company. Many firms use it in their reward/bonus system for their employees.

Measuring Success

Your objective is to create wealth for shareholders and so you will be evaluated on the cumulative change in Shareholder Value that your firm generates.

To see the shareholder value of your firm choose the “Financial Results for All Firms” report from the Key Reports menu.

Being evaluated on shareholder wealth is significantly different from evaluation based on net profit, market share, or earnings per share.

You can read more about this here.

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How to Increase Shareholder Value in MikesBikes

Common Mistakes made by Students in MikesBikes

Top 3 Questions Students Ask

MikesBikes Intro (Foundations of Business Simulation) Tutorial Videos

MikesBikes Advanced (Strategic Management Simulation) Tutorial Videos

company selling subsidiary

Takeovers: Selling Your Subsidiary | MikesBikes Advanced Business Simulation

You can sell your shareholding in a company at any time.

The sale price is based on the Share Price of the subsidiary at the end of the period in which you choose to sell.

The financial decisions you make for your subsidiary during the sale period will be ignored.

Any loans outstanding when you sell your subsidiary will be written off as a bad debt (debt to bank is unaffected)

If you are unable or unwilling to continue to lend to a struggling subsidiary then you should cut your losses and sell your shareholding.

Interested in learning more about Takeovers? Check this article out: Takeovers in MikesBikes Advanced

Production Efficiency in MikesBikes

Question of the Week: Why is my production efficiency low? | MikesBikes Advanced Business Simulation

A factory efficiency of around 70%-80% is very good. However, if you have a factory efficiency lower than this, then continue reading to identify what the issue is and how you can resolve it.

There are several factors as to why your factory has low efficiency. Check the following:

1. Raw Materials Stockout

Consider increasing your raw materials inventory or improve your relationships with your suppliers.

Raw Materials Inventory is the number of weeks worth of raw materials you wish to keep on hand. A higher inventory will help to avoid lost capacity through raw material stock outs. This does come at a price however, as each unit of raw materials incurs a holding charge.

Supplier Relations are expenditure that could be directed at negotiating single source contracts, providing suppliers with demand forecasts and educating suppliers in Just-In-Time and Total Quality Management techniques. It may also extend to paying incentives to suppliers who provide quality products, consulting suppliers when designing new products and paying increased transport costs to enable more frequent deliveries.

The benefits of investing in supplier relations include reducing line stoppages due to reduced unavailability and/or inadequate quality of materials. Current relationships with suppliers are only about half as good as they could be. It will require a significant investment to improve supplier relations, but once improved it will require a lower level to maintain this improvement as the level of accumulated supplier relations deteriorates over time.

2. Setup Time

You may want to consider increasing your batch size or spend more on reducing setup times.

Setup Time Reduction Expenditure includes expenditure on analyzing set up procedures and developing and documenting new statements of procedure. It also includes expenditure on plant modifications to facilitate quick changeovers.

Investment in set up time reduction will reduce the amount of time spent setting machines up and hence increase effective capacity (provided batch size remains constant). Other factors affecting the capacity lost to setups are: batch size, number of products, and product complexity.

We assume that there is a standard setup time of about 4 hours per setup. By investing in setup time reduction we can reduce this. Over the last 5 years setup times have been reduced by 5%. With the present batch sizes and number of products, each firm is losing about 10% of theoretical factory capacity on setups.

3. Rework Time

You may want to look at improving the skills of your staff through training, increasing expenditure on the maintenance expenditure of your factory and increasing your supplier relations expenditure.

4. Breakdowns

You may want to consider increasing your expenditure in preventative maintenance.

5. Idle Time

Idle Time is an inefficient use of resources causing higher average manufacturing costs per bike. You need some idle time to cater if there is higher demand in your products than expected, however having too much Idle Time is costly. To reduce this, you may look at selling some of your excess factory capacity and/or firing some of your workers to reduce your factory capacity.

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Standard Segment in Music2Go featured image

Market Segments in Music2Go Marketing Simulation: Standard Segment

This article will be a three-part series introducing the market segments in Music2Go Marketing Business Simulation. In this article, we’ll be talking about the Standard Segment.

Market Segments in Music2Go Marketing

There are three market segments in Music2Go – Standard, Youth, and Sports (Multi-Player only).

These segments have different sizes, projected growth, sensitivity to price, advertising, distribution, and product specs.

You start with a single MP3 Player product in the Standard market segment. Starting in Year 3 (after 2nd rollover) you may improve your existing product and/or launch additional products into new market segments (up to a maximum of 4 products by Year 6). Part of the challenge of Music2Go is in being able to balance the needs of your products within your limited marketing budget.

Standard Segment

Consumers in this segment tend to be less active than those in the Sports segment and thus do not require the high level of technological specifications inherent in sports designs. While young adults in this segment share the purchasing ability of their sports counterparts, they are more price conscious, which is reflected in the relative pricing between these two segments.

  • Medium priced ($85 – $100) with high price sensitivity
  • Price range is $40 to $120, but the recommended range is $85 to $100.
  • Medium sensitivity to advertising
  • High sensitivity to distribution coverage
  • Low sensitivity to product specifications
  • Consumer style / tech spec preferences change slowly, so segment moves
    slowly on perceptual map.

Since consumers in this segment are highly price sensitive, you can expect some price competition. Plan for this with cost reduction projects to maintain acceptable unit margins. However, be careful of engaging in a price war. No one wins a war. This is the slowest moving segment and has low sensitivity to product specs. So you may only require a single product spec improvement project midway through the simulation to remain competitive. It is the largest of the three segments but has minimal underlying growth.

You will be selling a single Standard Segment music player in the first two years of the simulation. After the 2nd rollover you may launch additional products into the Youth and Sports segments (Multi-Player only).

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Correcting a failed product development project

Question of the Week: How do I correct a failed Product Development Project? | MikesBikes Advanced Business Simulation

You want to get product development projects right the first time as this can be a costly mistake. It can mean either your Unit Prime Cost is higher than you want and/or your specifications are not as you wanted resulting in a lower demand for your product if they are wrong.

There could be two reasons why your project failed:

1. The project/budget expenditure was too low and/or
2. The requested unit prime cost was unrealistically low

As in real life, you do not want to commit to a product development project without checking that it was appropriately funded and that it would be able to provide an acceptable return on investment.

In addition, you have to be careful that the specifications you enter for your new product actually fall close to the ideal point of the segment you are targeting. Look under Key Reports for Perceptual Map of Market Segments to check this. Products outside the radius of influence (i.e. outside the circles) will not sell at all.

How do we conduct successful development projects?

We will walk you through an example where we develop the design for a racers bike. While the specifics and calculations may change, the steps you follow will be the same:

1. View the Indicative Values for Market Segments within the Product Development Scenario Information report to view the ideal product attribute levels desired by each segment.

(Note: These desired product attributes by each market segment change slightly from year to year so be sure to keep monitoring for the changes.)

Indicative Values for Market Segments

2. Take the current Style/Tech Specs of your closest existing Design Project and calculate the required change in Style/Design and Technical Specs.

In our example, the closest existing Design Project is our Adventurer Bike. You can view the Product Development Project Results Report to view your closest existing design paying attention to the Style/Design and Technical Specs:

Product Development Project Results Report

3. Calculate the difference in Style and Technical Specifications between the desired design and the closest existing design.

As you can see, in this example, our only and closest existing design project is our Adventurer product. This features specifications of 50 Style and 60 Technical. Our desired design project has targeted specifications of 20 Style and 86 Technical.

So the difference is 30 Style and 26 Technical.

Estimated Costs and Time Frames

We can see on the Product Development Scenario Information report that each unit of Style development costs $1000 and each unit of Technical development costs $20,000.

Our example calculation will be:

30 x $1,000 added to 26 x $20,000 = $550,000

Therefore, our design cost would be $550,000 on the new design to achieve 20 Style and 86 echnical.

4. Calculate your prime cost.

From the table above we can see that the prime cost will be calculated at roughly $0.1 to $0.15 per design and $4.50 to $5.00 per technical specification. We want a racers bike with 20 style/design and 86 technical specifications.

A conservative calculation would therefore be:

0.15 x 20 added to 5.00 x 86 = $433

If we enter any additional expenditure on to our design cost this will be used to further reduce the Prime Cost.

Note: This does NOT mean you should always aim super low with target Prime Cost.  If you aim too low, then your project won’t have enough money to achieve its objectives and you will miss your style / tech spec targets as well as your prime cost target.

How do I correct a failed product design?

A failed product design is a design that shows anything less than 100% success rate within the Product Development Results Report. Unfortunately this means you will need to design the design again. However! The failed design is likely to be a lot closer to your desired specifications than the previous closest design, thus it means it is likely to be cheaper to invest in. Simply follow the process above again working off the new closest existing design (even if the closest existing design is a failure).

Check out our Common Mistakes in MikesBikes Advanced article.

CRM System in AdSim Advertising Simulation

Customer Relationship Management in AdSim Advertising Simulation

What is Customer Relationship Management (CRM)?

Three periods into the simulation and you will be given control of your firm’s Customer Relationship Management strategy.

Customer Relationship Management or CRM is an approach to manage a company’s interaction with current and potential customers.

Retention of Existing Customers is a key part of how to win AdSim and this is your main decision for keeping them satisfied with your Customer Service Level.

Purpose of CRM

The purpose of a Customer Relationship Management strategy in AdSim is to decide which policies you will implement to try and keep Existing Customers loyal to your Digital Camera brand.

You will be able to measure the effectiveness of your Customer Relationship Management strategy through two market research reports:

  • The Customer Relationship Management Evaluation report.

CRM Evaluation Report

Showing your adverts to a focus group of New and Existing customers and asking them to rate your current strategy’s appeal.

  • Competing Products Customer Relationship Management Options.

Competitor CRM report in AdSim

A comparison of your product’s Customer Relationship Management Options with its competition.

CRM Decisions In AdSim

Customer Relationship Management Decisions tab in AdSim Advertising Simulation showing decision screens

In AdSim you are required to make decisions about four elements of your Customer Relationship Management strategy:

  • CRM SYSTEM

Decide whether or not you want to invest in a Customer Relationship Management database system? And if so what type? e.g. Entry level, Mid-Level or Custom Built.

  • WARRANTY

What length of Warranty that you want to offer your customers? E.g. 90 Days, 180 Days, One Year or Two Years.

  • SUPPORT

What level of a customer service do you want to provide? E.g. A manual, a website too, an e-mail helpdesk, or a telephone helpdesk too.

  • LOYALTY

What type of customer loyalty program do you want to administer? E.g. nothing at all, a regular newsletter, a regular photo contest or even a photo school.

On each tab of the decision screen, i.e. CRM System, Warranty, Support and Loyalty you are required to choose which option you think best targets your customers within your budgetary constraints.

Note that each option has a cost associated with it and that amount will be deducted from your Promotion Budget if you select that option. Generally the greater the cost of the option, the more appeal it will have to your market.

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Measuring Your Firm’s Success in MikesBikes Business Simulation

Your Objective

Your objective is to create wealth for shareholders and so you will be evaluated on the cumulative change in Shareholder Value that your firm generates.

To see the shareholder value of your firm choose the “Financial Results for All Firms” report from the Key Reports menu.

Being evaluated on shareholder wealth is significantly different from evaluation based on net profit, market share, or earnings per share.

Your Aim

You should aim to:

  • Maximize net profit
  • Minimize shareholder investment
  • Minimize risk (associated with high levels of debt)

Due to these multiple objectives, a small niche marketer consistently earning good margins and without much debt may outperform a large heavily-indebted firm with earnings several times greater.

Firms will need to carefully consider these objectives when developing their overall strategy, their marketing, operational and financial plans. Simply increasing in size will not necessarily lead to an increase in shareholder value. You should only invest money (for example in new plant, new product development, or on factory improvements) if you believe that the return on these investments will be greater than what shareholders could achieve elsewhere at the same level of risk (e.g. shareholders can earn returns of 8% by investing in a term deposit). If not, you should instead consider repaying debt, paying a dividend, or repurchasing issued shares.

For more detail on how shareholder value is calculated and how to improve this, see the How to Increase Shareholder Value article.

Perceptual Map in Music2Go

Question of the Week: What is the Perceptual Map in Music2Go Marketing Simulation?

Perceptual Map

The Perceptual Map is a convenient way of visualizing the differences between the different market segments in terms of the different level of Style / Design and Technical Specifications that each of the market segments desire. The center of these circles represents an “ideal” product for each market segment. So demand for your products will be higher if they are closer to the center of these circles.

Segment Movement Over Time

The style/tech preferences of the market segments will change over time. The Standard Segment moves relatively slowly, the Youth Segment moves at a moderate rate and the Sports Segment moves quickly on the perceptual map.

Perceptual Map Comparison in Music2Go

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Staff Salary, Training and Motivation level

MikesBikes Advanced Question of the Week: What happens if you invest in people and they leave?

Invest in developing your people in MikesBikes
By Peter Baeklund

Good people will stay longer, are more motivated and will work harder if you provide them with an opportunity to learn, and grow.

Some people will choose comfort and security, even if they’re not fully engaged with their jobs. This is both bad for them and for you.

According to current research, opportunity for growth and development are still two of the most powerful motivators.

Your business is nothing more than the collective energy and efforts of the people working with and for you. 

If you want to make your business better, invest in your people. They’ll get the job done.

Jim Bouchard

So what does this mean for you in MikesBikes?

Not sufficiently investing in training your staff, poorly paid workers and/or firing workers due to inaccurate capacity calculation will often result in a low skill and motivation index. In addition, another negative outcome of this is an increase in staff turnover rate, which means your products’ quality will also suffer.

So what should you do to ensure that your staff are highly motivated?

1. Pay your staff well

Workers are more motivated when they are paid well.

The average salary level you set will affect not only your bottom line, but also worker motivation and effectiveness. Factory workers are paid (on average) the rate you select. Administration staff are paid (on average) twice the rate. For comparison purposes, the average industry salary is $25,000 per year.

The graph below shows the motivation index achieved by changing the firm’s average salary from $25,000. The effect would be increased by sustaining the salary changes across succeeding years.

2. Train your staff 

You need to think carefully about the relationship between your overall strategy and how employee motivation and employee skill levels relate to that, especially if your strategy is to be a low cost, high volume manufacturer.

In general, well trained and motivated workers are more productive than poorly trained workers, so you need to employ fewer workers to achieve a given level of worker capacity. If your workers are well trained and motivated you need fewer Administration staff.

Well trained workers are a significant factor in improving your internal quality. Workers are more motivated when they are paid more and when they are well trained. They are less motivated when you fire other workers as their feeling of job security decreases.

The graph below shows the effect of job cuts on morale and staff turnover rate.

Poorly motivated and poorly trained workers can contribute to significant staff
turnover (sometimes as high as 40% to 50% per year). That gets expensive because each worker than is replaced costs $4,000 to replace. Also each new  worker arrives with a minimum level of training, so your average employee skill level is reduced which lowers your internal quality. So remember to maintain an appropriate balance in managing your workforce rather than using a ‘slave labor’ model even if your overall strategy is to be a low cost manufacturer.

3. Pay close attention to your workforce

Keep track of your staff’s Skill Index, Motivation Index and the Staff Turnover Rate by referring to the Manufacturing Quality Report every rollover. You can find this report in the Manufacturing menu > Reports tab and navigate down to the report.

Manufacturing Quality Report MikesBikes

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