Capsim Capstone Business Simulation

In this Simulation we were given a real-world scenario in which there were 6 companies competing
for the market share of sensors. We had 5 departments R&D, Marketing, Production, HR and
Finance.

Production and Finance

The role of CFO as a Functional Manager, whose job was to optimize the efficiency of the assigned
function and to coordinate strategy across functional boundaries. As a functional manager, he
assumed responsibility for the overall performance of several departments, including R&D,
Marketing, Production and Finance. Functional managers are the authority for all rules that apply to
their area.

Product Manager

The role of product manager. Product manager are responsible for highly specific projects that
develop new competitive advantages. Answered critical questions like “is the product positioned
correctly on the perpetual map?”, “Does the project have sufficient capacity to meet current and
future demand?”, “In marketing, is the price acceptable to the target demographic?”, “Considering
the expected demand for the segment and the number of competitive products, is the sales forecast
appropriate?”.

Segment Manager

Segment managers are the strategists and answered the questions including “Will new products
enter or leave the segments this year?”, “is there too much production capacity in the segment
(could lead to price competition)?”, “is there too little production capacity in the segment (could
lead to margin competition)?”, “How does the company’s distribution system (Sales Budget and
Accessibility Chart on the courier segment analysis) compare with competitors”, “What is the margin
potential for this segment?”, and “What will competitors do next year in this segment?”.

Human Resources Manager

HR was accountable for questions like “Is our company following all the necessary guidelines
presented in our mission statement?”, “Is our company following all the necessary guidelines
indicated by our competitors output highlighted in the yearly report?”, “As a company are we
making decisions in a timely manner?”, Are we following along our own conditions report in an
appropriate manner as to have successful growth for our company?”, “Are out final decisions
matching with our mission statement?”.

Competitive Intelligence Officer

Its task was to look at the market through the lens of the competition. Studied the yearly courier
report and answered questions related to competition like: “What segments matter most to them?”,
“What are they doing to achieve competitive advantage?”, “What will they do with their product line
next year?”, “is our company threat to the competition?”, “What could the competition do which is
not in our company’s interest?”, “How can our company influence the competition to do what we
want?”.

Mission Statement

Premium products for the industry: our brand withstands the test of time. Our mission is to bring
success and qualities to our stakeholders, management, and employees. Our products offer
excellent design and generate high accessibility and awareness with their industries.

Business-Level Strategy

We are seeking to establish flexibility and diversity its risk structure through the implementation of
the broad differentiator strategy. We aim to attack costs through atomisation of equipment,
efficiency in scheduling, effective deployment of TQM techniques and maximization of of plant
production capacities. Through effective product positioning and economics of scale, we will become
a market leader of the sensor industry.

Did

Competitor analysis

Capacity analysis

Material cost

Labour cost

Product implementation

Your Finance Department is primarily concerned with five issues:

1. Acquiring the capital needed to expand assets, particularly plant and equipment. Capital can
be acquired through:

o Current Debt

o Bond Issues (Long Term Debt)

o Profits

2. Establishing a dividend policy that maximizes the return to shareholders.

3. Setting accounts payable policy (which can also be entered in the Production and Marketing
areas) and accounts receivable policy (which can also be entered in the Marketing area).
4. Driving the financial structure of the firm and its relationship between debt and equity.

5. Selecting and monitoring performance measures that support your strategy.

Finance Department had to verify whether the sales forecasts and prices were realistic. Unrealistic
prices and forecasts will predict unrealistic cash flows in the proformas. Finance can determine a
range of possible outcomes for the year by changing forecasts then rechecking the proformas.

“Financial Structure” is simply the Liabilities and Owner’s Equity side of the balance sheet

Accounts Payable

What should your accounts payable policy be? Accounts payable (AP) is debt. You are leveraging
your vendor’s money. However, at 30 days they withhold deliveries and production falls by 1%. Your
production costs go up as workers stand idle during parts shortages. At a 60 day policy production
falls by 8%. At a zero-day policy there are no shortages. Given your measures, what should your AP
policy be?

Current Debt

Current debt is typically used to fund inventory and accounts receivable (AR) . However, those
accounts could also be backed by retained earnings. Given your measures, what should be your
policy towards current debt?

Long Term Debt

Long term debt is used to fund plant and equipment. However, you could use equity (common stock
plus retained earnings) . If you eliminate long term debt, its interest payment will disappear, and
earnings will go up. However, the profits used to pay off the debt could have been invested in new
plant and equipment, or you could have paid dividends to shareholders.

Predict the effect your performance measures will have on these tactics:

o Inventing a new product

o Reducing price

o Adding automation

o Adding capacity

o Increasing promotion and sales budgets

o Abandoning a segment to concentrate on a niche position

o Harvesting an old product

Retained earnings is the portion of profits not distributed to shareholders as dividends. While technically
the money belongs to the shareholders, it is controlled by management.
Equity

For example, return on equity (ROE) is defined as .

As equity approaches zero, ROE approaches infinity. Therefore, when a board of directors
emphasizes ROE as a performance measure, managers respond by minimizing equity and maximizing
profits. To minimize equity, they avoid issuing stock and they pay dividends to reduce retained
earnings. They match all investments with new debt (increasing debt, or leverage) . They work the
assets hard (asset turnover) .

Therefore, if the board says, “emphasize ROE,” you can predict that the company’s financial
structure will be at least 50%/50% debt to equity. It might be as high as 75%/25% debt to equity.

Let’s look at how the performance measures affect financial structure by examining each measure as
if they were the only one selected for the company. Examining the extremes can provide insight into
the usefulness of each measure.

Generically, return on sales (ROS) is an efficiency measure defined as .

ROS asks “How hard are we working each dollar of sales?” This is a pure income statement
relationship. However, if ROS is used alone, we could infer its effect upon the balance sheet and the
financial structure.

Return on assets (ROA) is defined as .

ROA is one of the most common performance measures. It mixes the income statement’s results
with the balance sheet’s results, answering the question, “How good are we at producing wealth
with our assets?”

As a measure, ROA has two drawbacks:

o It pays little attention to sales growth.

o It biases behavior towards the accumulation of equity.

Asset Turnover is defined as .

Asset turnover is another efficiency measure. It addresses the question, “How hard are we working
our assets to produce sales?” Since it mixes an income statement item, sales, with the balance
sheet’s assets, it should be a better predictor of general health than any of the measures we have
looked at so far. Unfortunately, it suffers from one important drawback—it pays no attention to
profit.
asset turnover multiplied by return on sales determines return on assets:

This is the same equation using the defining ratios:

Return on equity (ROE) is defined as .

ROE is an exceptionally popular measure with publicly held companies. It answers the question,
“what rate of return is the company producing for its owners?”

The difference between ROA and ROE is the use of debt, also called leverage.

Leverage is defined as .

Put this way, leverage asks, “How many dollars of assets do we have for every dollar of equity?” If
the answer is 2.15, then for every $1.00 of equity, we have $2.15 of assets, and therefore the
remaining $1.15 must be in some form of debt.

Owners note that ROE can also be defined as

This is the same equation using the defining ratios:

stock price is a function of:

o Book value is

o Earnings per share is

o Dividend per share

o Emergency loans penalties Book Value

There are only four ways to affect book value:

o Issue stock

o Retire stock

o Retain profits

o Pay dividends
Generally, book value climbs if management keeps the profits as retained earnings and does not pay
dividends.

Market capitalization (market cap) is defined as stock price times shares outstanding.

Contribution Margin is defined as Sales - Variable Costs. Variable Costs are the expenses that are
tied to the sale of each unit. They are recognized when a unit is sold. Because the number of units
you sell varies with demand, they are called Variable Costs. In the example above you sold 1 million
units. If you had sold 2 million, your Variable Costs would have been $38 million, but if you sold 500
thousand, they would be only $9.5 million.

Working Capital = Current Assets minus Current Liabilities

Current Ratio = Current Assets / Current Liabilities = (Cash + A/R + Inventory) / (A/P + Current
Debt)

Days of Working Capital = Working Capital / (Sales/365)

Leverage = Total Assets / Total Equity