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Cesim News Report

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by

Eric Gerenda

on 10 December 2014

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Transcript of Cesim News Report

What was
happening?

The market growth in this round was expected to be
20%
in Asia, in the USA
5-10%
, and in Europe
10%
. The Tech 2 device was touted as being an addictive product, and the value of the euro declined against the dollar.

What was our
objective?
Control costs as much as possible
Grow profitably
Grow our markets by focusing on the Asian markets and high return products

We increased market growth to
15%
in the USA,
25%
in Asia and
11%
in Europe. We increased estimated market share from
16.7%
in all markets to
21%
in the USA,
29%
in Asia and
21%
in Europe.
Why?
We increased our market share estimate from the introduction of the Tech 2 device and since it was new we gave it
3%
in each market. We also felt our pricing strategy would give us an advantage in
Asia
.

Green Team
tells Apple NO to joint venture.
Apple's CEO plans to meet with
Green
team to discuss possible joint venture.
We planned to change our priorities; to move products from the USA to Europe and then to Asia, to avoid tariffs.
Round 1
Begins.

MARKETING
&
PRODUCTION

GREEN TEAM
EXPANDING EMPIRE.

Objective: Grow Profitably

We set prices for Tech 2 at the same margin level as the Tech 1, roughly 20% over cost. We also set product pricing in Asia comparatively lower than our other markets (based on exchange rates) and bought more features for the European market as part of our market segmentation policy. We also changed prices in the 1st round due to exchange rates, not competition.

Why?

In the case description section entitled “Features”, it stated, “product features have different effects on demand in different market areas. European consumers are the most appreciative of product features, whereas the Asian consumers are more sensitive to price.” in terms of exchange rates we raised prices when the foreign currency fell so that we could maintain margin.


Objective: Control Costs and Grow Profitably

In this round, the tariffs in Asia would add an additional
$12
in costs to each unit exported, but contract manufacturing would add about
$24

more per unit.

This would defeat the purpose of producing product over there if it would cost more than exporting.

Since demand in Asia was higher than in the U.S. and Europe, we decided to build a plant in Asia.

The cost of the new plant in Asia was

$160,000
and set to open in round 3.

Our main market was Asia. Based on the market conditions report we adjusted the demand growth in the USA, we raised to
10%
, in Asia between
25%
, and in Europe
6%.


We continued to place our highest market share in Asia because it had the biggest demand growth and we increased our estimated market share there to an additional
6.2%.




$1.25
Wednesday, January 17, 2014
Vol XCIII, No. 311
Overall Strategy
How did they do it?
Green
Team Losing Market Share?
ROUND 3
Transfer Pricing:
Since this sets the price for goods and services sold between controlled entitles, we kept the transfer price in the one to one range.

Selection of Target Markets:
We kept our focus on Asia and assigned most of our market share to this. We estimated market growth in Asia would be 8% , in the USA
5%
and Europe
-2%
.
Based on the market conditions report and the war in “Oilstan”.

Marketing Decision:
All of our profitable growth up to this point consisted of meeting demand while controlling costs and lowering debt. According to market conditions, the war in “Oilistan” caused a growth “slowdown”. We lowered prices in the USA to gain market share, we raised prices in Europe, since we needed to make a profit with the negative growth there. We did not touch Asia since it was growing still.

Cesim News Report
We followed a global standardization strategy.

We controlled cost by operating on economies of scale.

We focused on two product lines the entire simulation.

This allowed us to produce substantial amounts of products for different markets with little customization, thereby keeping production costs low.

The product line chosen enjoyed the highest overall support worldwide from the network infrastructure.

Competition:
We used a competitive pricing strategy-but stayed away from price wars because we wanted to maintain our profitability.

Marketing
We set promotional costs to be about
3%
of our previous round’s profit and split that between our markets by the share of growth we wanted in that particular market.

Pricing
: We weren't trying to be the cheapest. We aimed to hover around the "midpoint" in pricing. We practiced price discrimination based on market segment preferences. We tried to keep at least
20%
margin. We changed prices according to exchange rate fluctuations and avoided “ price wars” by not reacting to extreme competitive price changes.
Features
: We controlled cost by adding features only in markets that would appreciate them and in markets with significant competitive pressures, since features had ongoing costs beyond initial purchases.
Europe:
Features mattered most, then price and promotion.
Asia:
P
ricing mattered most, then features and promotion

Production
We made
“buy”
decisions as much as possible.

This helped keep production costs
low,
as new factories had higher costs due to learning curves.

Outsourcing
R&D
helped us build new products or features quickly.

We built factories in
Asia

and outsourced manufacturing there, but exporting was actually cheaper in many of the rounds due to learning curve costs.


Transfer Pricing
&
Logistics


We prioritized the
Asian
markets, as that market grew. We shipped most of our product there since it had the highest growth rate.

We changed
Transfer Pricing
once.
Finance

Financing contributed greatly to our profitability.
Getting rid of our high interest debt early in the simulation helped us with reducing expenses.

Less debt helped us to raise the values of our shares.
Raising our share price helped us raise cash in future rounds when we sold stock.
The large cash equity helped to finance all of our plant opening without having to take out loans.
The large cash equity we had encouraged us to give out dividends.
Our dividend policy was to give out at least 5-10% of our last round’s profits to shareholders.
This helped raise the cumulative total shareholder return which was needed to win the simulation.

Practice Round Results
Global Market Share:
16.93%

Revenue:
$1,242,238

Profit:
$34,681

Share Price:
$158

Shareholder Equity:
$1,490,268

Cumulative Total Shareholder Return:
4.38

Placed: 4th

What did we learn from the
Practice
Round?
Key Learnings
- this was our turning point!
How to correctly add or reduce an amount such as debt
How to better manage production capacity
Learned to fine tune our R&D spending
Learned that controlling transfer pricing is important in lowering taxes as well as moving profits to other markets through internal loans
We learned how to use the forum to share ideas

Market Share:
Round 4 and up-We had opportunities to increase our market share estimates, but we underestimated and that led to under producing products and under utilization of our factories. Which hurt our market share and profitability.

Demand
Green Team
promises a huge return to investors.
PRODUCTION
MARKETING
"We couldn't
be
happier
!"
-
Green
Team Investor
Global Market Share:
29.21%
up 12.28% from practice round
Revenue:
$2,100,397
up from $858,159
Profits:

$473,740
up from $439,059
Share Price:

$158
(Tripled in round 2)
Shareholder equity:

$1,909,326
up from $419,058
Cumulative total shareholder return:

72.98
up 68.6
Placed:
1st


ROUND 2 BEGINS
MARKETING
We cut promotional costs to under
3%
, because we found that a reduction had very little impact on our market share, and helped to reduce overall costs.

We
increased
some prices of Tech 2 the USA and Europe because we added new features.

We raised prices in Asia, a few dollars since the RMB dropped in value and we wanted to protect our margin.

We activated one extra feature for the Tech 2. That decision more than doubled our sales; we went from
8%
to
19%
in sales growth.


Finance
Our equity ratio was over
98%
, we decided to pay a
$20,000
dividend to our shareholders.
Our stock price doubled, so we offered
10,000
shares of stock, which netted us over 2 million dollars.
We also
transferred
cash from the USA to Asia where they have a lower tax rate to increase projected profits.

Production
Even though there was a
civil war
, we were not producing enough. We had the market share to sell more Tech 1 devices, but we didn't have enough production capacity.

Our production capacity stalled at a little over
7,000 units
, but demand was estimated to be over
10,000
units. We decided to build new factories; estimated that we would need to build at least eight to ten factories to meet demand, at a cost of over 1-2 million dollars.

Each factory could only do
550
units; we were estimated to need an additional
5,000
units over our round two production for rounds four and round five.

Competitors
The market conditions stated that
Europe
and the USA were now able to support Tech 4, but we did not invest in this device, because we had a global standardization strategy that favored the tech 1 and 2. The new factories would be active in our last round since it takes two rounds for a factory and its cost to become active.

Assessment of Competitor Strategies:
The
Gray
team was lowering their prices low to gain market share at the expense of profits. This seemed to be a strategic approach to capture our market share. Most of our competitors also developed Tech 2 to compete with us and take away our first mover advantages.

Results
Major Turning Points: We had to start
acknowledging
that the pricing strategies of our competitors may take away some of our market share.

Successes: Our market share was up to
30.62%
, revenue was up to
$2,424,293
, profits were up to
$1,022,509
, equity was up to
$5,400,248
, cumulative total shareholder returns were up to
$55.14
, and the share price at the end of the round was up to
$444.90
.

Key Learning Experiences
Not
utilizing our production capacity correctly and we still had unsatisfied demand.

MARKET SHARE
PLUMMET
!!!

GREEN TEAM IN TROUBLE?
Financing Decision:
We issued
10,000
shares of stock, which netted us
3.6
million, we also issued a dividend to share profits with shareholders. This would help us stay on top of the other teams. It also would help us raise our stock price and help us pay for the new plants we want to open.
Production Decision:
Even though there was a civil war, we were not producing enough. We had the market share to sell more Tech 1 devices, but we did not have enough production capacity. Our production capacity stalled at a little over 7,000 units, but demand was estimated to be over 10,000 units. We decided to build new factories. We estimated we would need to build at least eight to ten factories to meet demand, at a cost of over 1-2 million dollars, based on the investment estimates given on the production page. Each factory could only do 550 units; we were estimated to need an additional 5000 units over our round two production for rounds four and round five.
Major Turning Points:
We had to shift some product going to Asia and send it to Europe instead, because we did not have enough capacity in production, so we had to adjust our priorities. We knew other teams would take advantage of our capacity problems and gain market share by filling the void.

Success:
Our share price at the end of the round went to
$550.20.
Revenue was up to
$2,736,997.
Profit was up from last round to
$1,262,224
, and total equity was up to
$10,252,298
.
Failures:
We had opportunities with market share as it went down from to
29.23%
and cumulative total shareholder return dropped to
43.92
since round 2.
Key Learning Experiences:
We saw that we were losing market share as competitors matched and countered our pricing and feature strategies. We also knew we had to be more aggressive with pricing, production, and features to
hold on to our lead.

Green Team
meets
with shareholders.

During Thanksgiving Break
Transfer Pricing
No Change in Transfer Pricing.

Any change we tried seemed to raise our tax burden.
Target Markets
Decreased estimated demand:
USA

3%
Asia
7%

Europe
unchanged
Focused
on the Asian market
Which was growing
(At the expense of less profitable markets such as the USA and Europe.)
Marketing Decision
Followed aggressive pricing policy
Lowered prices in the USA by

10%

on all models to
counter
competitor strategic pricing.

Raised prices in Europe

10%

On the Tech 2
Lowered the price on the Tech 1 by
10%
Under priced
Tech 1 compared to the competition.

We did
not change
promotional pricing in this round or change the critical pricing much in Asia.
Financial Decision

Sold 10,000

shares of stock
Which netted us
4.6
million dollars.
We needed this cash to finance our plant openings in round five.
Allowed us to share our profits with our shareholders.
$10,000

in dividends.

Moved
3 million
dollars in profits from the USA to Asia
200 million
from the USA to Europe.
We assumed this would aide us with financing new plant openings and relieving some of our tax burdens.

Production
Production
decreased
this round.
Reports of exploding handsets.

Utilized
71%
of our capacity.
Even though we had additional plants, the system only allowed us to utilize that amount.

On our decision production page it showed we had
100%
capacity, but we still had unsatisfied demand.
This seemed to be a glitch in the system.
Results
Assessment of competitor strategies
Competitors:
Lower prices
Added features and models
Which
increased
their sales and
allowed them to take market share from us.

Major turning points
First round where we were not
first
in global market share.

RUMOR MILL
Green Team thought the
market was
closed

during break.
Success:

Total equity:
+
$15,920,250

This Round:
Largest profits
Largest Total Shareholder return
Achieved this by:
Limiting our interest expense
Which
reduced
our liabilities
Letting us keep more of our profits.
Failures:

Market share:
Dropped to
24.7%

From
29.23
in the last round
Revenue:
Dropped to
$2,136,445
Profits:
Dropped to
$1,022,204
.
Gray team had higher sales and revenue.
We should have raised promotional dollars to increase sales.
In
hindsight
, we should have purchased more features to create more value for our products in the marketplace.
We could have changed transfer pricing to reduce our tax burden more also.
KEY FINDINGS
Transfer Pricing
&
Target Markets
Transfer Pricing:

No Change

Target Markets:
Turmoil around exploding handsets had been settled.
Investigations concluded that there was
no
explosion on the plane tied to handsets.
Set Market growth:
15%
in Europe
20%
in the USA
40%
in Asia.
Previous round
:
We only achieved
12.5%
of the USA market
37%
of the Asian market and
18.5%
of the European market.
In this round, we estimated our share of the market:
USA to
expand
to
30%,
Asia to
47%
, and Europe to
30%.

Marketing

Bought a new feature for
Tech 1

Tech 1
now had all available features.

Tech 2
, we decided to invest in adding another feature, which was produced in-house.
As a result, of the increased demand and added additional feature to
Tech 1
, we raised all of our prices significantly compared to round four.
Finance
&
Production
Finance
Sold

10,000
shares of stock
Netted us 4.0 million and we gave out 100,000 in dividends, per our financing policy.
Production
Produced:
10,769
units
Which was about half of what we could have produced for the factories we had.
Outsourcing:
Tech 2

3,000 units (Saved us $125 per unit on average.)

Competitors
&
Turning Points
Assessment of competitor strategies

Competition was adding new models and features. Lowering their prices drastically below our prices in the USA and Europe.

Major Turning Points

Competition taking market share
We realized we had to spend money on features to be competitive.

Failures
&
Learning Experiences
Failures
Gray team beat us in revenue
By
$789,253
Cumulative total shareholder return decreased
To
20.52

Key Learning Experiences
Raised our prices too high
Higher than they should have been.
What helped us achieve higher profits was the
Tech 1
.
Some competitors abandoned this model.
There was still a market for it and we captured it.

ROUND
5

Green Team makes public statement to investors,"Trust the process."
GREEN TEAM WINS CESIM
Success:
Market share:
26.53%
Revenue: Increased to $2,818,362
Profits: Increased to
$1,228,807

Total equity: Increased to

$21,142,843

THE END.
ROUND 4
Full transcript