BUSI 601 Final Capsim Project PDF

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Capsim Project. Mandeep Kaur (1918571) Karamvir Kaur (1916232) Tamandeep Kaur (1916120) Aamir Rao (1913176) University Canada West Professor: Ozen Asik. BUSI601 03/19/2020

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Introduction Capsim is an online simulation business that allows students to supervise a multimillion-dollar company that manufactures sensors. Since the beginning, the main objective of the Digby Sensors has been to set the unique identity of the company apart from other competitors and build goodwill in the market and form brand loyalty with consumers. This objective has achieved by offering the best quality products to customers at reasonable prices and customer’s affordability. We were four members of a team. There were five other companies in the market which were competing with each other during every round. An important decision was to locate the product between the segment of high-tech and low- tech where it could fulfill the requirements and target both industries as well as determine the ideal spot of the product was also considered to achieve a high success rate in the market. Capsim provides access to the user to operate every department from the first of the product to the final step when it eventually reaches to the customer which consists: 1. Research & development 2. Marketing 3. Production 4. Finance We followed the strategy of broad differentiators and produced two identical product Dream and Date. Our first product was highly successful in the industry it targeted both high tech and low-tech segment. Low tech customers highly preferred to the product with the lowest price range. Price matters more for them, it means they are price motivated. Research & Development

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R&D department looks after the invention of sensors. This area is highly responsible for retaining the product in the right direction on the perceptual map. The product is manufactured according to the demands and needs of the customer. Capsim has divided the customers in two different groups that are low tech and high tech. High tech customers prioritize the product according to the ideal position, size and performance than the other factors such as age, price, and MTBF. Marketing The area of marketing consists of 4P’s which are Product, Price, Promotion, and Place. During the whole process of marketing, these 4P’s are considered. This area decides that when, where and how the particular product is sold in the industry. The promotion budget and sales budget is also decided in the marketing overall it put an effect on the Gross Revenue as well as on the Contribution margin and variable costs. Production Scheduling of the number of products and their quantity is done under this department. The total quantity of produced goods is fixed under in it. Users can buy and sell capacity, the number of units to buy and sell in thousands. There is a one-year lag before the new capacity arrives so that is why it is not available in the current production year it will automatically available in next year. By entering a positive sign capacity can be bought on the other side to sell the capacity by entering a negative sign. Finance The finance department controls the funding that the producers need to operate the product in the whole year and if we do not have sufficient funds to cover up the costs then we will need to get an emergency loan with interest rate. To issue stocks and bonds finance is required as well as huge capital is required for successful operations.

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Our overall strategy at the beginning of the competitive rounds was to have two distinct products for the low tech and high-tech segments and simultaneously ramp up production capacity and automation for both products to capture the growing market share every year/round.

Highlights/ Synopsis Round 1 Research & Development In the first round itself, we unanimously decided that we would create a new product in the low-tech segment called DATE with PFMN 4.9, SIZE 15.4 and MTBF 14000 which was in sync with the product criteria. We only made minor adjustments to our existing product DAZE because we wanted to discontinue this product and sell off its capacity. Marketing As we wanted to discontinue the existing product Daze we spent only modest amounts of $1000 each respectively on promotions and sales/distribution. We priced our product competitively at $29 to gain more market share but without paying attention to the contribution margin which was working out to be only 8%. Production We had a first shift capacity of 800, we decided to manufacture 1500 which is 187% of the production capacity as we wanted to generate a decent revenue. We also bought capacity 550 & automation 1.5 for our new low-tech product. Finance

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The next obvious step was to finance our expenditure on sales and promotions but most importantly to finance capacity and automation purchased. We believed that long term debt would be the most suitable so we borrowed $2400 as long-term debt. We also issued shares of $1100 and took a short-term loan of $1000. Outcome We were stock out for our existing product DAZE. We had a decent market share of 19.39% in the low-tech segment and 19.18% in the high-tech segment. But unfortunately, our profits were negative because of the low contribution margin as mentioned earlier, we realized that our selling price was very low and decided that going ahead we would maintain a contribution margin of at least 25%.

Round 2 Research & Development In round 2 we decided to create a new product in the high-tech segment with the following configuration (PFMN 8.1, SIZE 11.9, MTBF 17000) which was as per the market criteria then. Our new product in the low-tech segment was now ready. Our original product was once gain repositioned with minor changes as we intended to discontinue this product. Marketing Keeping in mind the last round’s mistakes of not appropriately calculating/ considering the contribution margin we revised the price of our original product DAZE upwards to $32.50 but decided not to spend anything on its promotion or budget as we were going to produce only a small amount of this product. We allotted a modest amount of $1000

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each to promotion and sales and set the price of the new low-tech product at $34.50. We forecasted to sell 1050 quantity of this product. Production We scheduled production for daze at 400 which was 200% of the total production capacity. We had sold off 600 capacity of the existing product DAZE. But we made one huge blunder we did not schedule production for our new low-tech segment product DATE for which we have a sales forecast of 1050. This for sure would have huge repercussions on our financial position. At the same time, we also bought capacity 450 and automation 2.0 for our new high-tech product DREAM. At the same stage, we bought additional capacity and automation for our low-tech product DATE. Finance To finance the additional capacity and automation we once again went with long term debt and borrowed $5000 but now at a higher interest rate of 11%. We also issued stock to the tune of $2700 as long-term debt would not be sufficient. Outcome As mentioned earlier regarding our blunder in scheduling production it had a catastrophic effect on our position. We somehow escaped the emergency loan but everything now was in the negative from profit margins to ROA and ROE. The leverage was the highest as compared to our competitors which was a worrisome situation. We decided that going ahead we needed to curtail our expenses and increase our sales and production. But most importantly keep an eye on the contribution margin.

Round 3

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Research & Development In round 3 we were just trying to implement what we had planned at the end of round 2 which was to increase sales and production. We decided to completely phase out DAZE our original product and focus our attention on the 2 new products. We tweaked our low-tech product date increased its PFMN to 5.1 and size to 14.9 keeping the MTBF unchanged. Marketing We once again allocated modest budgets to promotion and sales at $1000 each for promotion and sales for both low tech and high-tech products. We set prices for both products in the price range mentioned in the product reports. As we had limited resources, we were compelled to restrict our spending on promotion and sales. Our sales forecast we believe was slightly over-optimistic but we reasoned that we needed the sales to compensate for the losses we incurred in the last round. Production In round 3 we began by first selling off the remaining capacity of DAZE which was 200. This was in sync with our original plan of discontinuing the original product. We further bought capacity 225 and automation 0.5 for DREAM and for DATE we purchased capacity of 250. Finance Again, similarly to round 2 to fund our expansion of production capacity and automation we had to rely on long term debt so we borrowed an additional $5500. We also undertook another short-term loan of $1000. Our long-term debt was now increasing which was an area of concern. Outlook

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Unexpected but we were taken aback by the results. We had an emergency loan of 16,052,868 which was unexpected. Our sales forecast had been wrong. Even though our sales were comparable with our competitors, what went wrong was the unsold inventory/stock in both segments. We had the lowest overall market share of 14.25% which resulted in a negative cumulative profit of $615699. We had an inventory of 174 in the high-tech segment and a staggering 828 in the low-tech segment which was seriously denting our profits. The inventory in the low-tech segment amounted to almost 40% of our production. A 12% carrying cost would now have to be incurred on the unsold inventories this would exponentially now increase our expenses. When we introspected as to what went wrong our analysis showed us that the lack of sales was due to the lower specifications and higher prices of our products as compared to our competitors. We then planned that in the next round we would make some drastic changes to both the products.

Round 4 Research & Development Coming from the setback of rounds 2 & 3 we decided to drastically upgrade both the products. We repositioned our low-tech segment product to PFMN 5.9 from 5.1 and size 14.2 from 14.9 and keeping the MTBF unchanged which I believe eventually was one of the major reasons for the slack in sales which we did not realize until the end of this round. Our hightech segment product too was repositioned from PFMN 8.1 to 9.0 and size was reduced from 11.9 to 11.2. Marketing This time around in marketing we thought of the strategy of lowering our prices drastically from previous rounds. We pegged the prices for the high tech segment product at

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$39.50 and $29.50 for the low tech because we intended to sell more through a price cut. As we had a severe cash crunch due to the emergency loans, we decided to reduce the spending on sales and promotions considerably. Despite having surplus inventory on both segments, we decided to produce 2200 in the low tech and 1200 in the high tech. Our strategy or thinking then was that an increased sale could only help us to overcome this financial burden which we put ourselves in. Production Similar to previous rounds we maintained a decent contribution margin of around 30% in the high-tech segment and 25.5% in the low-tech segment. We also decided to sell off some of the capacity to improve our cash position. Finance Even after selling off some capacity we needed cash reserves for operations hence we once again turned to long term debt and took another loan of $4700 at an interest rate of 13.1%. We also issued a small qty of stock in this round. Outcome The outcome was even more disastrous than the previous round. We hit the panoc button. Our emergency loan had touched $58,584,996 which was almost four times the last round. Our cost was high which was obvious due to the 12% we had to pay for keeping the excessive inventory. But surprisingly our sales were flat. It was almost the same as the previous round at $50,951,162 despite us producing 2200 in the low-tech segment and 1200 in the high-tech segment. After careful analysis, we realized that once again it was the piling inventory in both segments that was posing a serious threat to our company. We had an unsold inventory of 2000 in the low tech and 720 in the high tech, we needed to figure out a way now to get rid of this existing stock before planning for any production.

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We then consulted our professor Ms. Ozen Asik who was kind enough to guide us as to what measures we could take to control the situation. We were also connected to the Capsim team in Chicago. The guidance and assistance we received from both were pivotal in strategizing our future decisions.

Round 5 Research & Development Coming from rock bottom position we decided unanimously to take a more conservative and cautious approach this time around. We repositioned both our products. We made significant changes to both the products. The new specifications were 7.7, 12.0 and 19000 for the low tech and 9.2, 11.2 and 19000 for the high-tech product. Marketing We now decided to focus on selling only the existing inventory. We made a forecast based on the inventory in hand and decided to enhance our sales and marketing budgets for both products. We allocated $2300 each for promotions and sales for the low-tech segment as we had a higher inventory in that segment. We allocated $900 each for sales and promotions for the high-tech product. Our only aim now was to liquidate the existing inventory. Production To finance our marketing strategy, we decided that we would rather sell some capacity rather than take further loans as this would control our liability burden. We decided to produce nothing in this round or rather till we can sell our existing inventory. Finance

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It was kept at the same levels as last round. No additional borrowing was undertaken. Outcome The biggest sign of relief in this round was the emergency loan which was halved in this round to $30,924,138. The sales figures were similar to the last round. The cost was even higher than the previous round because of the high carrying cost for the huge inventory. But the biggest positive from this round was that we were able to sell a significant portion of our existing inventory. We sold approximately 950 units in the low-tech segment and 525 units in the high-tech segment even though this product was now outdated. We still had a significant inventory left which needed to liquidated as soon as possible.

Round 6 Research & Development Coming into round 6 with the priority being selling the existing inventory, we decided only to make minor changes to the high-tech segment product. We upgraded the high-tech segment product to the following specifications (9.6, 11.2 & 20000). Both our products were now ready for production with the new specifications. Marketing As we still had considerable inventory leftover of the low-tech product, we allocated a reasonable amount of $1300 each to promotion and sales. We also increased our spending on the sales and promotions of the high-tech segment. Prices for both these products were kept in the desired range. Production

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As we still had a sufficient quantity of unsold inventory in the low-tech segment, we decided not to produce anything rather just focus on selling the inventory. We decided o produce a small amount of the high-tech product as we had limited inventory of that. In this round to meet our cash needs, we decided to sell 100 units each of both low tech and hightech capacity. Financing Similar to round 5 we did not indulge in any borrowing. We wanted to first stock out our items and then think of any further expansion.

Outcome We finally broke the trend of negative profits and registered a decent profit of 2,666,942 though our sales figures were similar to the last round. A big positive outcome from this round was that we were successful in reducing our emergency loans to just $2,586,546 which was the lowest among our competitors. Moreover, our asset turnover was the highest. We were successful in selling 1075 of the low-tech products which were now getting obsolete and would be more difficult to sell, in the end, we were left with just 160. In the high-tech segment, we sold around 438 and were left with just 289. In short, were successful in reducing our inventory and curtailing the spiraling debt. Learning Curve Lessons learned We enjoyed the whole experience during the team project, but we were not happy with the results because we didn’t get what we want or expected. Some of the strategies went well, at the same time many were not due to which our company Digby suffered from loss. We didn’t

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know the causes of the failures. We tried to put every kind of strategy to earn some profit, but we failed. Before the last round of Capsim Simulation, we took advice from Ozen and representative of Capsim how to improve, then we came to know about our mistakes. Following, we explained some good and bad things happened in six rounds in brief. What went well We were clear about our strategies as Digby performed very well in the trial rounds and hope for the best in the competitive rounds as well. In round 1 & 2, we produced two new products Date & Dream for a low segment and high segment market respectively. In round 1, Digby had the highest high segment market share among other teams. Digby had the highest number of total assets till round 4. Digby had better sales in round one and had positive profit and cumulative profit. What didn’t well The biggest mistake we made was that in round 2, we forgot to enter the amount of goods produced for Date and that made to suffer the company in remaining rounds. As a result, the sales were reduced, and profit and cumulative profit went to negative. Then we continued to produce more products in round 3 and got the alert of emergency loans that was a huge amount that our members never expected. Our inventory remained in stock. To reduce the loans, we stopped the production for some time and had to sell our assets. What we do next We came through ups and downs in the whole experience but learned a lot of things about running the business.

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The one thing that we would do differently is focus on all aspects equally, not overly focus on one aspect and neglect the other, because one mistake can set you back for a couple of rounds. So, focusing equally on all aspects would be top priority.

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Before going through the action plan, evaluate and analyze the decisions so that no problem will happen in the future that we had in round 2.

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Consider the needs for both low and high segment market more carefully. Both are important for business surveillance and never take one over another.

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We need to decide on the strategies and procedures more in depth and then make any decisions.

Conclusion In conclusion, the simulation is an integrated online learning practice that discusses the principles of business management, that can be used by participants for taking strategic decisions. The simulation thus gives students the opportunity to apply the discipline specific skills and expertise in a practical competitive environment and by following this Digby adopted the policy of releasing products for both the high-tech and low-tech markets in competition rounds so that its products could be widely known on the market and consistently and effectively updated in the market. We have our team's structure coordinated to operate. It was necessary to schedule every step of our judgement ahead of time and then give us all the chance to express our viewpoint. It is essential to use logical reasoning throughout the problem-process to achieve a satisfactory performance. To be precise, it allows us to accomplish a simple purpose and clear tasks.

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